American Express Case: The Story of AmEx Canada

American Express Case: the story of American Express Canada

Key Takeaways: Ivey MBA, Howard Grosfield CEO of Amex Canada Article

  • Total Service Experience: replace cards easily over night in the event of a lost card.

Recognize me: be valuable; engaged employees = engaged customers. Empower me: to pay the balance in full! Enable me: leverage technology integrate service provisions.

  • Luxury AMEX Card: differentiated from the Diner’s Club Card (Visa). AMEX has high fees, the rolling debt balance is very bad.
  • Amex is more expensive for merchants however Amex has better customers: wealthier customers. The merchant network is weaker (charge them a higher fee) but the customers are better.
  • Centurion Services: centurion members have access to professional assistance every minute of the day. It’s the Concierge: dedicated team of highly skilled professionals. Centurion webs: privileges platform.
  • Product Expansion
  • Branding / Positioning
  • Strategic Diversification
  • Distribution / Co – Branding
  • Product Innovation

1850 – Founded as express courier service

1891 – Launched travellers cheques

Don’t leave home without them

Early 1900’s – opened offices in Europe

1957 to 1978- green, gold, platinum card

1987 – launched Optima Card

1991 – Boston Fee Party

1999 – Exclusive arrangement with Costco

1999 – Launch of Centurion “Black Card”

Travellers Cheques Advertisements

1981 – acquired Shearson Rhodes

1984 – acquired Lehman Brothers Kuhn Loeb

1984 – acquired IDS

1988 – acquired EF Hutton

1991 – wrote off $300 million on Optima credit card launch

1992 – spun off First Data

1993 – spun off retail brokerage arm

1994 – spun off Lehman Brothers

2005 – spun off Ameriprise

Push to capitalize on brand / expand co branded cards beyond Costco – Starwood, Jet Blue, Delta

2008: GFC affected all credit card issuers, forced to tighten up credit – less impact on AMEX

2010: Paid $300 M for internet payments processor for consumers without bank accounts (Revolution Money became Serve)

2012: Launched BlueBird with Walmart – prepaid credit card as option as lower option to chequing accounts and debit cards

Cost pressures: Airline mergers forced Amex to open airport Amex lounges versus giving cardholder access to airline lounges

Attack on high end customers from Barclays and JP Morgan Chase – Chase now leads card penetration among $125K plus households

2015: Costco switched credit cards to VISA, 10% of Amex’s 112 million cards were Costco

Question about value of Amex brand – 23% of $1 trillion in spending from co branded cards

– “Partner” vs “Vendor”

  • 19 card options
  • Card Type: Personal vs Small Business
  • Card Benefits: Rewards, Concierge, Cash Back
  • Loyalty Programs: AeroplanPlus, Air Miles, SPG, Membership Rewards
  • Card Attractions: No Fee, First Year Waived, Welcome Bonus
  • Blue Sky Credit Cards
  • Response Time When Apply?

Card options

Drop in new customers in 2014 from 150K to 80K – half via referrals, others via traditional methods

Tested pop-up in a shipping container in shopping mall parking lots / in malls (take up eight parking spots) – local area marketing to drive traffic

Signed up more customers in two months than best Scotia branch in a year

Key is credibility of Scotia and single minded focus on customer acquisition – salespeople only in the pop up branch, videoconference customer to an advisor if needed

Now have nine pop up branches that shift location every 60 to 90 days

Now back to 150K; if 8K per popup = 160 weekly / 25 daily

Retail Asset Management – FinTech History

Innovation in Retail Asset Management: 1960 to 1980

  • Launch of Index Funds (Vanguard – 1975)
  • Acceleration of mutual fund sales in the US first true “star manager” in Peter Lynch / Fidelity.
  • 1980 – $8 billion est
  • 1985 -$15 billion est.
Sold Not Bought: Role of Salesperson Compensation:

Historically: One time commission paid by investors (up to 9%)

1987 – Launch of deferred sales charge and trailers paid out of management fee of 2.5%

Front end commission: 4% upfront plus trailing commission of .5%

Backend compensation: Nothing upfront

but 1% trailing commission

Power of salesperson led to “buying business”. Sales people fueled major change in the way Retail Asset Management started.

Banks start to focus on fund sales via branches

  • Growth of independent advisors – shift away from captive sales organizations (closed to open)
  • Focus on stealing customers from banks
  • Emphasis on US and global funds outside Canada to overcome home market bias
  • First ETFs launched in Canada (TIPs)

Growth in Canadian Mutual Fund Industry (billions)

1980 – $   8  est                1995 – $144

1985 – $ 15 est                  1996 – $211

1990 – $ 25 est                  1997 – $287

1991 – $ 50 est                  1998 – $335

1992 – $ 67                        1999 – $397

1993 – $115                       2000 – $433

1994 – $125                       2001 – $441

  • Interest rates on GICs and bonds
  • Boomer demographic / saving years
  • Scepticism about CPP
  • Market performance
  • Media coverage
  • Banks starting to focus on mutual funds (beginning with money market funds)
  • Industry innovation
  • Strategic Asset Allocation – STAR (Mackenzie funds only) and Keystone (include outside funds)
  • Clone funds to get around the foreign content limit within RRSPs (originally 20%, later increased to 30%, then eliminated)
  • Corporate class funds to allow investors to switch between funds without triggering capital gains
  • Fee structures for HNW and fee based accounts

Growth of Canadian mutual  fund industry assets (billions)

2002        $404                 2010  – $   772

2003        $474                 2011  – $   769

2004        $524                 2012  – $   849

2005        $603                 2013  – $   996

2006        $696                 2014  – $ 1138

2007        $739                 2015  – $ 1232

2008        $585                 2016  –  $1339

2009         $694                2024  –  $2000 (Forecast)

Net sales of Canadian funds

2004      – $12 billion             2011 – $31 billion

2005      – $10 billion             2012 – $36 billion

2006      – $17 billion             2013 – $42 billion

2007      – $22 billion             2014 – $58 billion

2008       ($15 billion)            2015 – $57 billion

2009 – $  5 billion              2016 – $30 billion

2010 – $11 billion             2017 – $19 billion (to July)

 

1990                     1998                     2011                     2016

Banks                   36%                      29%                      46%                      53%

Independents      35%                      53%                      45%                      39%

Captive / Direct   29%                      18%                      9%                        9%

Loss in Share by Banks was due to:
  • Performance
  • Advice
  • Internal Barriers
  • Level of Focus and Priority
  • Internal Conflict / Cultural Issues
Banks Made Five Key Decisions
  1. Ensured competitive products – shifted to packaged solutions
  2. Approached high value customers with dedicated branch financial planners
  3. Aligned incentives – implemented variable compensation / pay for performance for planners
  4. Deployed sales management for planner salesforce
  5. Incentives to activate branch referrals from front end staff

 

Growth of Canadian ETF assets (billions)

2002        $   5                    2010      – $    38

2003        $   9                    2011  – $    43

2004        $   9                    2012  – $    56

2005        $ 12                    2013  – $    62

2006        $ 15                    2014  – $    75

2007        $  18                   2015  – $    88

2008        $  19                   2016  – $  114

2009   $  31                        2017 –  $  134 (August)

Threat from ETFs – Sales

ETFs       Mutual Funds  ETF Share of Funds

1999                     .07                 18              0.4%

2010                        3                  11                    27%

2011                        7                  20                   35%

2012                     11                  31                    36%

2013                        5                  42                    12%

2014                     10                  58                    18%

2015                    16                   57                    28%

2016                     16                  30                    53%

Three Types of Innovation

1 Breakthrough

  • Passive investing: Burton Malkiel, Princeton
  • Three factor research: Fama and French, Value, Small Caps and Momentum
  • Junk bonds: Michael Milken
  • Asset allocation: Gary Brinson
  • Stocks for the long run: Jeremy Siegel, Wharton

2 Incremental

  • Income Trusts
  • Income oriented offerings / return on capital
  • Dividend growers vs dividend sustainers
  • Low volatility funds
  • Fundamental indexing / Smart Beta
  • Active share
  • Geographic sectors – Emerging Markets, Frontier, Japan
  • Industry sectors – Technology, Energy, Pharma, Telecom, REITS
  • Tax driven
  • New instruments – Leveraged loans, Floating loans, Bank debt
  • Market sectors – small caps, mid caps
  • Market Responsive
  • Fee structures
  • Tax structures
  • New pricing and features targeted to different segments   

Startup Theories | Big Bang Disruptions and Marketing Myopia

Marketing Myopia: Levitt’s 1960 HBR article

The point of Levitt’s article was that businesses should focus on customer needs rather than business ideas. The illusion that a firm is in a growth industry is a common one. There are no growth industries! Presumptive growth is not guaranteed. They instead need focus on the vision of customer needs. You are not in the business of a particular industry, you’re in the business of customer value creation.

People cannot accurately predict the future and therefore there is no such thing as a growth industry. Management needs to see the broader market; you need to be single minded about what the customer wants.

Self-Deceiving of Management:

  • Growth through market segment expansion
  • Too much faith in manufacturing
  • Preoccupation of careful scientific experiments;
  • Too narrow understanding of the customer / narrow industry view.

Examples, Petroleum = Energy not oil!

Corner Store = Food distribution not retail groceries!

Buggy = Transportation not horse and carriage!

Retirement Homes  = Childhood for Seniors

If the management understood that they were in the transportation industry not in the horse and carriage industry; they might well have avoid the decline of GM in the 2000s.

Big Bang Disruptions:

The idea with Big Bang Disruption is it is an article that buildings on Christensen’s Crossing the Chasm.

Key takeaways:

  • Make your exit at the right time;
  • Jump before your garbage falls on you;
  • Wrong attitude or right attitude (is this Big Bang Disruption really for MBAs and academics?)
  • They aren’t trying to disrupt you, you’re banker job is just part of the debris.

Unencumbered development: hackathon culture.

Unconstrainted growth: there are the 5 segments by Everett Rogers Crossing the Chasm, now there are trial users.

Undisciplined strategy: start life with a better performance at a lower price.  Venmo; faster cheaper. Not trying to disrupt your business, you’re business is collateral damage. Be ready for the fast escape.

  • Consult your truth tellers: candor Jack Welch.
  • Pinpoint your market entry:
  • Launch seemingly random experiments: confuse people
  • Survive catastrophic success
  • Capture winner-take-all markets
  • Create bullet time
  • Anticipate saturation
  • Shed assets before they become liabilities
  • Quit while you’re ahead
  • Escape your own black hole
  • Become someone else’s components
  • Move to a new singularity.
  • Strategic Discipline: Compete on all three disciplines at once.
  • New-Product Marketing: Market to all segments of users immediately. Be ready to scale up and exist swiftly.
  • Innovation Method: rapid-fire, low-cost experimentation on popular platforms (Reddit, Facebook, Twitter)d onto the technology needed to deliver the Model-T.

Read the CFA Institute’s New Infographic on Trust

The CFA Institute produces an excellent curriculum that dovetails nicely with a top MBA program and/or undergraduate degrees in finance and accounting. Understanding how finance works to facilitate capital markets is a very useful and a worthwhile endeavor. It helps if you have an interest in how the economy and business works, but there are a lot of dispassionate people in finance as well, so no worries if you aren’t like me. This infographic is an excellent break down of the steps needed to increase credibility and professionalism in any investment firm: very challenging with downward pressure. The ethics portion of the CFA Level 1 exam is the most interesting part for me, having a penchant for the law. Click here of the original infographic on the CFA institute website.

Phil Knight | ShoeDog – A Synopsis (Everything You Need to Know)

1962 – Synopsis | Travel the World to Get Insights & Chase Dreams

air-travel-not-as-commonPhil Knight, aged 24, traveled across the world to chase his Stanford MBA dream of creating a shoe importing business. Now a days, air travel is accepted as part of pop culture, with bucket lists, gap years and travel vlogging becoming the norm. But back in the 1960s, ninety per cent of Americans had never boarded a plane. Most Americans had not travelled more than 100 miles from their home.

Phil or Bucky, as his dad used to call him, felt hesitant to ask his father for money to support a plan to travel the world from Hawaii, Berlin, London, Paris to Tokyo, Cairo, Athens while also exploring his business venture idea in Japan. Phil knew before going into the chat exactly why his father would reject the travel plan. Phil Knight’s dad ran a local Portland-based publisher and was a former lawyer with a poverty stricken upbringing. He was someone whose aim in life was to achieve respectability, and more importantly, to be seen as respectable by the society around him. Respectability demands a stable career, a beautiful wife and obedient children – children who don’t randomly have the urge to travel around the world. However, Phil’s request plays on his father’s youthful regret of not travelling much, and he gets his way immediately.

Travel the world monument conceptKnight decides to enlist a friend for the journey, his Stanford buddy Carter was excitedly on board with the global adventure. They had an amazing ‘beach-drenched’ time in Honolulu, where the itinerary goes out of whack because they fall in love with the place so much that they decide to rent a place and find jobs. From selling encyclopedias to securities, Phil finds he is uncomfortable being a salesman, and even more uncomfortable with rejection. Eventually, he moves on in his travels alone, as Carter chooses to stay behind for a girl he found. The journey Knight is on is one of self-discovery, to find out what interests him – and perhaps denotes something we all can relate to at one point of time or the other.

nike-goddess-of-victoryHe describes his travels through various countries, elaborating on the ones he enjoyed the most while the rest are clipped to a couple of sentences. Knight searches for spiritualism everywhere he goes – as if he is seeking out a power higher than himself to give him directions. He does find the teachings of various cultures, but nothing moves him as he expected it to. Greece and its architecture, however, leaves a lasting mark on him. Athena the goddess of victory “Nike” is of particular interest. It might be historical revisionism but that name might come up later…..

onitsuka-co-tiger-shoesPhil Knight creates his first business pitch in Kobe. Japan at the HQ of Tiger Shoes, Onitsuka Co. He was warned by two American ex-occupation military guys about how Japanese negotiating is completely different than the typical aggressive American manner. So Phil practices what he will say and how he will deal with his proposed pitch of the “Crazy Shoe Idea.” In the meeting, which featured top Tiger Shoe brass, Knight ends up speaking from a safe space – channeling the speech he gave at his entrepreneurship presentation at Stanford, something he had studied really hard for (‘58-’62) and which had been then the basis of his “Crazy Shoe Idea.” The basic pitch can be captured in the title of his small business class paper: “Can Japanese Sports Shoes Do to German Sports Shoes What Japanese Cameras Did to German Cameras?”

yenKnight was pleased with how the meeting went. The Onitsuka team seemed intrigued with his US distribution strategy which was peppered with quantitative insights, market sizing and a vision for getting Tiger ensconced into the US mainstream. When they asked what the name of his company was, Knight replied with “Blue Ribbon”. His pitch also hit a nerve as the Japanese management were seeing Yen ($) signs via the US track. Without knowing the outcome of the meeting (as Japanese are stereotypically hard to read), Phil had his father wire fifty bucks to Onitsuka so that they could send over shoe samples they talked about in the meeting.

classi-tiger-shoe-designWhen Phil arrives home, looking bohemian and travel worn, the first thing he asks his dad is if the shoes have arrived. This part of the ShoeDog story is interesting not just because there is a very beautiful description of every country he visited, but because the reader can see the author’s passion for shoes developing in successive stages – from nothing in Honolulu to noticing the shoes of even beggars and statues. Great minds connect desperate events to create innovation; Knight was already on his way to greatness.

shoe-dog-by-phil-knightThe above synopsis is based on notes from ShoeDog by Phil Knight.nike

1963 – Synopsis | Accounting is a very useful skill

beat-the-cpaPhil Knight’s family dynamic has changed upon his return; he finds that something has changed in him – it is not just his scruffy beard and castaway attire that causes his mother to thoughtfully call him ‘worldly’; there is a fundamental change in his spirit. Buddhism had captured him; be one with the path.

accounting-for-phil-knightHaving been betrayed by someone he thought was a business associate and having lost fifty dollars borrowed from his father for the purpose of getting a specific pair of shoes shipped, he comes to the realization that he is actually drifting in life without a sense of purpose. He brings this up with his father, who encourages him to talk to a friend of his, Mr. Frisbee.

Mr. Frisbee had officially ‘made it’ in life – he was an alumnus of Harvard Business School and had quickly risen to become the CEO of a New York State Exchange Company. This makes quite an impression on Phil. In a meeting with Frisbee, Knight hears a useful philosophy of working, saying that everyone typically changes three jobs before they hit upon the right one.
ledger-phil-knightNow, if you are not adequately educated, your career and earning scale might go down as you progress from job to job instead of going up. Therefore to secure a solid financial return, it is necessary to do two things – get a CPA to strengthen the MBA Phil already had.

This though poses a problem for Phil because he hadn’t studied accounting as a major and didn’t have the necessary hours to qualify. He therefore enrolled at Portland State for three accounting classes. Portland State is a far cry from something like Harvard (something that both Phil and his father realize), but Knight finishes his nine hours and starts working at the accounting firm Lybrand, Ross Bros. and Montgomery. It is one of the Big Eight National firms, but the offices in Portland are quite small. Knight takes this positively, reflecting that this would give him a chance to learn the language of business.

Phil quickly discovers the downside of a small branch at L.R.Bros & M. There is no one to take up the slack when the workload increases, which means that everyone is logging in long hours, not leaving much opportunity for the learning process. However Knight admires the CEO, Al Reser, who happens to be a mere three years older than Phil.

ledgerThe best example of how important work is at this firm is reflected when Phil is refused a holiday on the day after President Kennedy’s assassination. Of course, the upside to all this is that Phil is earning well. So he buys a car for himself. His life has finally taken a definite direction, and he seems set in his profession too. However, the chapter closes with him often wondering if his travels around the world in ’62 were the peak of his life, and there is nothing better to look forward to…..

shoe-dog-by-phil-knightThe above synopsis is based on notes from ShoeDog by Phil Knight – Founder of NIKE INC.nike

1964 – Synopsis | Finding Bill Bowerman & the Importance of Rejection

female-lion-images-photos Growing up equipped Knight to deal with rejection, both in professional and personal life, something that was severely lacking in him before. His mother (Lota Hatfield Knight) is an interesting character, who may, as per first impressions, seem meek, but had many layers to her. She was a confident woman who did not hesitate to support her son in front of anyone, whether it was her husband or the outside world. She did not speak much, but proved herself through her actions.

Bill BowermanAnother important figure in Phil’s life is Bill Bowerman. He was a taskmaster during Phil’s University of Oregon stint. Bowerman was frugal with praise and known for churning out successful athletes. Phil yearned for his approval, but knew that it was not something that he’d get much of. Having finally received his shipment of shoes from Japan, Phil Knight sent over two of the pairs to Bowerman, expecting him to praise the shoes. Bowerman asked to meet Phil over a deal to buy more shoes and it goes even better than expected – Bowerman wants to be a partner in this business. He calls Phil over to meet his lawyer, which causes him some trepidation, but the discussion is brief and settles any fears Phil had.

The Tiger shoe import business booms, and Phil feels immensely content and happy with his success. However a wrinkle pops up when a competing US distributor on the East Coast sends a letter to Blue Ribbon demanding they stop selling Tiger shoes. Unable to take rejection, Knights falls back into old habits, but eventually decides to fight back and makes a visit to Japan. Phil’s character essentially changes – instead of allowing rejection to simply make him miserable, he lets it propel him into success. He flies to Japan and successfully gets rights to sell the shoes for another area in his thirteen states.

Mount FujiIn 1964, Knight also falls in love after meeting a girl while climbing Mount Fuji. It is a whirlwind romance, and they part without any plans of meeting up. One day, however, Sarah lands up at his doorstep and it is here that the love affair actually begins. The family is charmed by Sarah, and the author falls head over heels for her. Eventually, Sarah cools off and this causes heartache to the author, but brings up a very essential relationship to the forefront – Phil’s relationship with his sister Jeanne which till now has not been talked about. She supports him and speaks the first words of comfort that actually reach him, and goes on to become the first employee of his company since she had read all of Phil and Sarah loveletters to eachother, she would manage the mail room at Blue Ribbon.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

1965 – Synopsis | Banks are Risk Averse & The PwC Experience

blue ribbon phil knightAll along, Phil Knight believed that growth was possible for Blue Ribbon, his company importing Tiger shoes from Japan. His bank, however, had a different idea. A conservative banking institution, they did not believe in risk and were only concerned with maintaining equity in case of failure. This is key commentary on the difficulties faced by entrepreneurs back in the day. Entrepreneurs have various funding options, but back then even inter-state financing from banks wasn’t possible. Venture capitalists were a far cry, and investment in startups wasn’t an established subculture. There wasn’t much encouragement given to a new idea.

Tiger Shoes 1965Phil Knight renews acquaintances with an old classmate he had met on the tracks one day, Jeff Johnson. Johnson reveres the sport of running like no other, and looks upon it as something almost divine. Although enthusiastic and energetic, Johnson is perhaps too much so. Beginning with working part time for Knight, Johnson ends up becoming the first full time employee of the company through sheer doggedness, quitting his day job for it. Johnson is relentless in his communication – Phil starts getting overwhelmed with Johnson writing two to three letters everyday.

With the bank continuously bearing down on him for maintaining equity and having to wheedle for a loan everytime he needs to order a shipment, Knight applies for the position of an accountant and gets recruited by Price Waterhouse. This becomes a stepping stone for him as he meets the next big influence in his life – Delbert J. Heyes, the leader of his team. Heyes makes Phil look at numbers in a way that makes him feel like an artist. Moreover, this job allows Knight to intricately study how and why different kinds of companies go under, and how the ones that survive flourish. Cash is king in all cases; accounting and cash. Phil starts taking notes for the purpose of his own company.

Phil also begins drinking a lot, courtesy the company of Mr. Hayes and the Reserves. With a full day ahead of him, he begins to handle his job, the Reserves training as well as his company all at once. With so much alcohol in his system, it becomes difficult to handle but Knight rallies on. Bowerman, on the other hand, rises up to help the company while Knight is so engaged. Having received a grand reception in Japan upon visiting the shoe factory offices, Bowerman gets excited about new possibilities and works on endless new shoe modifications for adapting Tiger’s Japanese products specifically for the American feet. Knight also picks up life lessons from Bowerman in ’65 about making the most of twenty four hours in a day. Apart from shoe design and his coaching, at a time Bowerman had multiple projects going on; for instance, trying to make the perfect energy drink for track racers. Bowerman was effectively inventing Gatorade. On top of that, Bowerman managed a family life as well as reveals that he is writing a book.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

1966 – Synopsis | Bluff When You Have to & Failure is Okay

Phil Knight was anxious about the ending of the one-year contract with Tiger and waiting for an alert to either renew the contract or end it. By the end of 1966, Phil had sealed a three-year contract over the head of a better placed, richer East coast operation. The journey between how this is made possible is a lesson not only for entrepreneurship, but in life itself.

1966 was the point in time when Knight actually starts realizing the importance of Johnson. Divorced, broke and car hurting from an accident, Johnson managed to reach levels of sales that Knight himself believed to be impossible. Having made a deal with Johnson that after reaching a certain number of sales Knight would allow him to open up the first retail store, Johnson is ecstatic and puts in all efforts to make it the place for runners to be.

Johnson knew best1966 was an important landmark not just in Phil’s journey but perhaps also the history of running. Running for fun or just to keep fit wasn’t common back then, and runners were often made fun of. In the middle of all this, Johnson opens up a place that looked great, but also has essential books on running, some from Johnson’s own personal library and souvenirs for the more dedicated customers. It becomes a place for runners to find solace, to find more of their own.

Phil Knight ExclusivityAlthough Knight does not like to offer encouragement or reply to Johnson’s letters too often, preferring to leave him to his own devices, he is faced with no choice when he learns that a major competitor is angling for exclusive rights for selling Tiger shoes in America. Plotting overnight with Jackson at his apartment, Knight visits Japan to find that everything has changed – from the man in charge to the conference room furniture.

The difference between the last time and this time is evident to Phil – there is more confidence, more poise and much more ease in handling the negotiations. He successfully bluffs his way into making sure he is awarded the contract, but Knight does this by lying that he had an East Coast office where Tiger could ship their shoes. Phil faces the problem of actually having to erect an East Coast office and paying for a large shipment by biding his time.

Though always a risk taker, Phil is firmly in the territory of risks. There is no going back from this point. Aware of the possibility of failure, Knight has grown way past his days of fear of rejection and only hopes that if he has to fail, he fails at the earliest point so that he may use his lessons from this failed venture in the next. The change from a sheltered, rejection averse boy to a man who can find positivity in the face of complete failure is stunning. Phil does not fear failure anymore, but welcomes it with open arms, and this attitude ends up winning him a great deal against a competitor who won’t even be aware what hit them.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

1967 – Synopsis | Appreciate Dedicated Staff

Returning back from Japan with a 3 year contract of Onitsuka, Knight procrastinated in his communicating to Johnson that Blue Ribbon needed an East Coast store because Phil wanted someone else to do that job. Sometimes procrastination is difficult to avoid, Phil kept procrastinating giving Johnson the news that Johnson had to move to the East Coast. So much so that Knight hired a new store manager in Santa Monica to replace Johnson without telling him. When Johnson phoned Knight, however, Johnson accepted because of his lack of confidence. The next day however, he asked for a stake in the company or a profit participation and a raise. Via letter; Johnson threatened to quit with a two part ultimatum, one was to make Johnson a full partner in Blue Ribbon and two was to raise his salary to $600 per month + 1/3rd of all profits beyond the first 6000 pairs of shoes sold or he walks.

Just when Knight has begun to appreciate Johnson’s loyalty as a team player, he is forced into a meeting with his salesman father Owen’s office who was bent on getting his son a stake in the company. The negotiations end with a fifty dollar raise for Johnson. Despite all this, this is where Knight has begun to appreciate Johnson truly, having recognized the fact that it is near impossible to find someone ready to uproot their life and open up a new office in a new location in such a short time.

This is also the turning point where Blue Ribbon actually begins to expand into a company. Hires are made one after the other on the recommendations of Bowerman, new offices are moved into both by Knight and Johnson. It is plain that the failure that Knight had always seen forthcoming and prayed for to come early is held at bay for now. The growth of the company seems positive and inevitable. Woodel is a special hire out of Oregon, whom Knight hired under the recommendation of Bowerman. Woodel was a track athlete but was wheelchair bound after he was injured when a float fell on top of him while moving it with a team of 20 guys.

There is a legal face-off with Adidas over the name of a new shoe, which only serves to highlight that Blue Ribbon is now beginning to affect the big leagues. Although it is early days, the competitive mindset of Blue Ribbon is evident when they name their new shoe Cortez after Adidas made them back off the name Aztec because Adidas was going to use it (Cortez defeated the Aztecs).

Knight’s relationship with Bowerman is also further developed in 1967. Bowerman’s book, a thin volume on jogging, goes viral and changes people’s outlook on running, almost making it seem ‘cool’. Knight is pleased at first, hoping it would add to the company’s success, but when he actually gets down to read it, he finds that Bowerman has clearly stated that running is not about shoes or branded apparel – one can use any kind for running.

This hits Knight badly for the purpose of his business, of course, but also on a personal level as even now Knight is looking for approval from Bowerman. That urge hasn’t gone away, and is the same since his school days. It also reflects on Bowerman’s character that running is something that is above business or profit for him.

Even with the company making-do with less than best facilities – like cracked windows that let in the cold or the noises of the pub that start from four everyday – beyond all of that, the beginnings of big success are evident. From a single basement in Knight’s parents’ home to multiple employees and offices, the company is growing fast and quickly. Even though Blue Ribbon was successfully doubling revenue year on year, it still could not support it’s co-founder Phil Knight after 5 years of operation. But Phil did not enjoy PWC enough and that work was too time consuming so he found a low key job as an assistant professor at Portland State. Phil decided he would focus on his shoe business which was as far as Phil’s father was concerned “still jackass-ing around.” Even the equity problem at the bank is staved off by meeting revenue expectations.

As an assistant professor, Phil knew that accounting is about balancing these equations. He met Penny Parks in his accounting class. In fact she turned out to be the best student so Phil hired Penny as a bookkeeper. Knight asked her out on a date and they hit it off and were married within a year.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

1968 – A synopsis

This chapter begins with Phil Knight deliberating about leaving his long-hours job at Price Waterhouse to be able to devote more time to Blue Ribbon. However, financially, it wasn’t possible to just work at Blue Ribbon. So he accepted the assistant professor at Portland State University, which allows him to earn income as well as have more time for his company. His senior at Price Waterhouse and his father both are baffled at his decision to quit his job.

This is where the story of how he meets his future wife begins. She is a student who looks different than everyone else and diverts his attention by sitting in the first row. A Julie Christie look-a-like, Penelope Parks never participates in class discussions (which the author makes lively by using the Socratic method), but ends up surprising the author by getting the topmost grades in her assignments.

He eventually asks her if she would be interested in doing accounting work for his company, and she acquiesces. She soon becomes indispensable, both from a professional as well as a friend. Phil one day finds that she has kept all her salary cheques uncashed in her drawer, and this is what perhaps gives him the courage to ask her out on a date. They go to the zoo where he tells her more about himself, his travels around the world and his dream for his company. She is suitably impressed as she has only dated ‘boys’ who are interested in sports and cars.

They go on a couple more dates, and become more comfortable with each other. They end up meeting each other’s parents, and discover that their homes are as different as possible. Phil’s parents are polite but insist on knowing more about her. Parks’ home, in contrast, is rowdy and in disorder. Phil eventually connects with Penelope’s mother, who begins to like him.

With things going smoothly at the office and at home and Penelope spending increasingly more time with him, he asks her mother permission to take her away for a weekend with him. She refuses the first time, but Phil uses his negotiation skills to get her to agree the second time round.

The trip is successful, he proposes since having a relationship with a student wouldn’t bode well long-term, and ends with the couple very matter-of-factly deciding about their upcoming marriage.

This chapter also deals with Knight’s observations on Japan and its culture. He openly admires their way of doing things, their shyness and his growing camaraderie with Kitami, who invites him to his department’s annual picnic.

An important incident here that highlights the author’s character is his sending fifty dollars to a man in Japan named Fugimoto who lost his home and bicycle in a typhoon. Phil has just met and conversed with this man once, yet considered it important enough to help him out. The man replies saying he can’t accept the money as per the instructions of his superiors, but cleverly adds a postscript saying that if Phil instead sends the money to his home address, he will be able to take it. So that’s what Phil does so. Fugimoto would later become Knight’s spy against Onitsuka.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

1969 – A Synopsis

Now that the company is running in a stable manner with regards to steady sales, attention is drawn to other important factors like advertising, athletic endorsements etc. Knight recruits a broke art student for painting advertisements when he realizes how behind they are in that field.

Mention is also made to the historic moment when two athletes, John Carlos and Tommy Smith, raised a protest at the Olympics as a protest. Knight mentions that Bowerman naturally supported them, because he would support all runners. This adds to the facet of Bowerman’s personality revealed before – of putting running before everything. Not only is it above business (he never mentions his company in the bestselling jogging book), but it is also above his beliefs, whether racial or otherwise, at the time. He supports his runners simply because they are that.

Knight’s naiveté is also shown in this chapter when he openly puts in the mail to all his employees saying he has his own spy working on Kitami. He is also revealed to be a difficult person to live with, absentminded, a bad driver, not neat and spoiled in the sense that he is unable to take care of himself. His wife lovingly puts up with all of it. However, when she gets pregnant and they buy a house and Knight makes it clear that the house will be taken away if the company goes under, a major development in her character is reflected.

Knight also mistakenly takes a harder than necessary stance with an employee who is overburdened with work and wants a raise and is starting to detest Knight’s offhand management style. Woodell helps patch this trouble over by staying with the employee for a few days and effectively bonding with him.

Penny has always been shown as a diligent person who becomes indispensable to the office, but now, she works harder than ever before even when she is pregnant. Her fear of not having stability drives her more than anything else. She fills out uncertain and badly drawn orders, keeping up sales numbers through her days of morning sickness and weight gain. She is a stellar character who rises up to the challenges of Knight’s life.

The relationship between Woodell and Knight also develops. This is the first time that Knight speaks of someone with such fond remembrance that one can detect a yearning of nostalgia for times spent with Woodell. Woodell is an inspiration and much more self-reliant than most able-bodied men. He abhors pity and is dedicated to his work. He quickly becomes a very important part of the Knights’ lives, both professionally and personally.

Knight also reaches another key point in his life – he becomes a father. He is both scared but mostly wondrous at the feeling of having created his own child with his wife when he first holds his son Matthew. He is ecstatic, and the first thought that comes into his mind is to find his father and tell him the news.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

 1970 – A Synopsis

This is the point when Knight faces many challenges, including one in his personal life. The gamut of challenges starts with a meeting for contract renewal in Japan that goes well but leaves him in doubt nevertheless. He secures 3 more years of Tiger shoes with distribution rights but simultaneously, orders start coming in with even worse delays – earlier, they used to be merely late, now they are the wrong models as well the wrong sizes. Customers start getting frustrated in large numbers. Of course, the Blue Ribbon staff understands that Onitsuka Tiger are likely first fulfilling their demand in Japan and then sending the leftovers to America.

Next, Knight gets told by his banker that there will be no money given to him any longer, and to return the money he already owes, he must fulfill strict sales quotas set by the bank. Here, for the first time, Japan offers to send the shipment on time – just when the bank has backed out. Knight comes up with the idea of a small public offering to capture the tide of companies that put the work tech or electronic in their name in order to rid the stock craze of the Nifty Fifty era.

He names the offering the “Sport Tech Company” but when this public offering disastrously fails, however, it leaves Knight’s confidence in his life’s work shattered. He is left questioning himself. Although he blames various things for it (Vietnam, the depression) he is ultimately racked with humiliation at having thought too much of something that clearly was not. Still struggling, Knight struggles to find money so badly that he accepts the last life savings of Woodell’s parents.

To continue the downward spiral, Knight also loses the physical agility which he was so proud of. Having gained weight, he could no longer run the way he used to. It all comes down to one humiliating moment when Knight cannot keep up with Grelle in a private run. But this serves as a springboard, and Knight begins to shed the extra kilos.

He trains hard, comes back and beats Grelle in a running bet. This is perhaps the beginning of better days, because Knight finds out about Japanese trading companies, who like to extend lines of credit to fledgling companies. This provides Knight an option after the bank debacle. But he is careful, and takes time to decide.

He discovers some disturbing news – his doubts in the meeting in Japan were correct, it is evident that Kitami is shopping for another US dealer to distribute the Tiger shoes products. This is when he makes the strategic decision of inviting Kitami to his country and his home.

There is a subtle link between the physical fitness of Knight and his ability to keep his company running. This is perhaps because in the past chapters he has always used running as something to soothe him, or calm him down, or even blow off steam – he has gone on a run before big deals or before big decisions, often feeling better afterwards. His lack of physical fitness came as a realization to him at a particularly low point professionally. But once he overcomes that and goes back to his previous weight and is able to proudly run again, even bigger problems than before seem easier to resolve.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

1971 – A Synopsis

This chapter is whirlwind of ups and down, and reveals the character of the mysterious Mr. Kitami at length. While the Knights make his and his assistant’s American visit as hospitable as possible in order to help re-centre their relationship since Knight was told that Tiger was looking for alternative suppliers in the US, Kitami appears to be intentionally over react during a meeting at the bank by outright demanding that the bank “give Blue Ribbon more money to support its operations” and then storms out of the meeting. Knight is shocked, but catches the smug expression on Kitami’s face as they exit the bank, understanding that Kitami is trying to sabotage this deal in more ways than one.

Phil’s position was clear: Blue Ribbon could increase sales if they had more shoes and would have more shoes if the bank could lend more money, and the bank would lend more money if Onitsuka’s contract with Blue Ribbon was greater than 3 years and if the terms of service for delivering the shoes were tightened up. Blue Ribbon could seek funding from a trading company such as Nissho but Kitami said that they would send money first then take over second.

  1. Onitsuka was only manufacturing 1/4 of their own shoes and subcontracting the other 3/4st to cheaper suppliers;
  2. Kitami was worried that Nissho would find out which cheap suppliers were involved and then go around Onitsuka to produce the product and put Onitsuka out of business;

Kitami continues this irritable behaviour at the new offices, refusing to acknowledge the steady double growth as a good thing, demanding more. Here is where a side of Knight previously unseen is revealed. On continuously hearing that their growth should be triple through reference to a folder, Knight becomes curious and pilfers through a folder from Kitani’s briefcase while he is in the toilet. Shocked at himself, he confides in Woodell, who is shocked as well, but wants to analyze the contents nevertheless. The folder showed 18 US manufacturers and Kitami was interviewing half of them on this trip to replace Blue Ribbon. This was the ultimate betrayal. The next day, Woodell and Knight slid the folder back into Kitami’s briefcase when he wasn’t looking.

Here it is evident that although both men have a good conscience, when it comes to their business, there are some lines that they wouldn’t mind crossing.

Kitami’s unforgivable behaviour continues when he leaves Penny alone to fix a flat tyre on the highway, himself just sitting in the car. Things continue to go downhill at a get-together at the Bowermans’, where Mrs. Bowerman has allowed alcohol when she generally doesn’t. Tensions are already high due to the war, and Mr. Bowerman gets really tipsy and makes his anti-Japanese sentiment known. The weird night ends with Kitami playing songs on a guitar, making everyone fall into silence.

For the first time, Bowerman’s goofy side is shown. He is always the quiet, resilient and diligent person in the background, but at this get-together, he does not mind being the verbose centre of attention. Perhaps it was this effect of alcohol that made Mrs. Bowerman forbid any alcohol in the house.

Kitami goes off on a two week trip and then returns to Portland where he proposes that Onitsuka would like to buying out Blue Ribbon (51% ownership stake) or otherwise Onitsuka would have to seek out superior distributors. Knight is forced to come up with a strategy to save his company. He stalls his decision and Kitami leaves without a problem.

Then First National decided to stop supporting Blue Ribbon just around this time. The perfect storm was brewing. So Knight got a deal with a small bank in California. But he turned back to the Japanese trading company (Nissho) which was looking for huge upside ventures like Blue Ribbon. Nissho was willing to take a second position to Blue Ribbon on their existing loans which would have quelled their bank needs. And to top it off, Nissho had been rejected by Onitsuka and so Nissho was embarrassed and wanted to work with Blue Ribbon. They were offering them access to a whole host of Japanese manufacturers to work with. The only problem being that Blue Ribbon’s contract with Onitsuka forbade importing any other track and field shoes…but the wheels were turning and Phil Knight was introduced to a shoe factory producer in Mexico that was called Canada and he was impressed to the point where he made an order of 3,000 pairs of soccer shoes which were not track shoes. This didn’t violate the terms but it broke the spirit of the contract with Onitsuka. The factory owner wanted to know the name of Knight’s brand, he said he’d get back to them on an answer soon.

Phil calls up Carolyn Davidson who had done some ad work and asks her to create a new logo that would set King’s company apart from Onitsuka and Adidas. She came back 2 weeks later with various lightning bolts and other motion like icons. Knight singled out 5 and gave her a few more days to refine. It looked like a wing and invoiced Knight $35 USD. Knight picked the one that looked the best although he wasn’t happy with it.

One of the most historic moments of the story also falls within this chapter – the naming of the brand as Nike. Woodell wanted Falcon, on of the other staff wanted Bangle and Knight wanted Dimension 6. All terrible. After thinking of various names that the employees could not agree on, Jeff Johnson phoned Woodell to explain that he had a dream, the Greek goddess “Nike”. The name Nike was decided on in desperation. Nike was like Xerox, Kodak. He thought about the victory in World War 2.  and so is a symbol resembling a swoosh of air. Knight sent the message that the product is called Nike.

After trying out various factories, including the factory Canada which sucked, Knight finds a dream factory that manufactures shoes to his satisfaction; a Nippon factor that build Firestone tires. Although he finds a few faults, overall, the quality control and the manufacturing speed are above reproach. He ends up naming the rest of the models in a fit of exuberance, and feels victorious afterwards. That feeling of victory is similar to how he felt when his son was born – the words ‘we made this’ are common in both situations.

Knight had spent 3 weeks in Japan finding manufacturers. And knew that Onitsuka would hear about his visit so he invited Penny over for the last week to make a visit to Kobe. Onituka and Kitami all got together. Fugimoto the spy was also invited.

Knight also recalls that Bowerman was interested in innovation in the soles of these shoes in preparation for the 1972 Olympics. He was looking at waffle irons in a new way and believed that they could be the basis of a new rubber sole. Turns out he was inventing the future.

This chapter is important not only because of the beginning of the evolving of the company as it is popularly known, but also delving into aspects of personality of the characters previously unexplored.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

1972 – A Synopsis

This chapter focuses on how the company starts shaping its own unique identity. Till now, Knight and his people have been working hard, yes, but they have always been controlled by someone else; by Onitsuka Tigers and by Kitami the vendor contact that effectively bossed Knight and Blue Ribbon around. The key was that they would need at least a few months of Onitsuka inventory to keep the cashflow coming in order to support the Nike venture, so Knight needed to be super quiet and hope that Kitami didn’t read local papers. Although Japan’s support was important in the initial stages, this chapter shows how the company has grown strong enough to throw away the shackles and follow their own path, somewhat deviously. After all, the Onitsuka contract stipulated that Blue Ribbon could only import track shoes from Onitsuka factories and with the Tiger brand.

At a trade show early in the year, shoes salesmen showed some interest even though the dream manufacturer’s shoes were flawed, some of the paint was too shiny. The orange Nike’s stacked up beside the Onitsuka Tigers perplexed Knight’s team as well: Johnson, Woodell in particular. One of the customers was asking “what the hell is a Nike?” Knight explained, “it’s the Greek goddess of victory”. And what is this logo?” Knight – “it’s a Swoosh.” Customer – “What’s a swoosh?” Knight – “It’s the sound of someone running past you!” They loved it and bought pairs. Johnson couldn’t believe the excitement and asked one sales rep why he was buying inventory, he said “because Blue Ribbon has never bullshitted us in the past, and we’ve been doing business for years.”

Kitami flew over to Portland in a rush and demanded to understand what had gone on at the trade show.  He confronted Knight asking  what was the deal with the orange boxes and the “Nik-e” pronouncing Nee-kay. Knight explained that it was a sideline he had developed in case Onitsuka did as threatened and yanked the rug from under Blue Ribbon. Kitami was on his heels, how many Nike’s did you order? Who manufactured them? Knight answered. Knight fibbed that the Nike’s were not in stores….Kitami finally wanted to know when Phil would sign his papers and sell Blue Ribbon to Onitsuka…clueless.

Kitami stormed off to one of the Blue Ribbon shoe stores and found boxes upon boxes of Nike shoes stacked in the back. Thus follows a meeting where both sides threaten each other with lawsuits, and their business connection is terminated. Knight, in this chapter, shows the true qualities of a leader. Till now, although effective, there hasn’t been much evidence of Knight encouraging people, as he prefers not to be the hands-on type of leader. In the meeting after this incident, however, Knight single-handedly converts the defeat and pessimism in everyone’s body language to hope and an eagerness for success. The story after this almost feels destined for success.

The rest of the chapter deals with Nike and how it gets itself into the endorsement business. It begins with the National Sporting Goods Association Show, where despite having mediocre product the company manages to exceed all of their collective order expectations. In disbelief, when asked why they were ordering the product at all, the salesmen confess that they know that this company always tells the truth. Although bewildered that such a simple thing could be behind this success, the answer sticks with Knight.

The company also meets with good success at the Olympic field and track trials, where they get athletes to wear their apparel and their shoes. They eventually end up signing a deal for ten thousand dollars with Ilie ‘Nasty’ Nastase the tennis pro for $10,000.

To top it all off, the University of Oregon Ducks unexpectedly win, and they do so wearing Nike waffles. Knight is ecstatic because it is a double whammy – his team is winning while wearing his product.

In this chapter, Knight also consciously or subconsciously reveals that this is the turning point from which there is no return. Till before this, Knight’s mindset has always been that if the business fails, it had better fail fast, because then he can get out young. But here, after witnessing the legendary win of Prefontaine and the emerging of the Ducks as winner, it is clear that Knight loves sports so much they are a part of who he is as a person, and he will never be truly able to turn back.

Knight gives Prefontaine a job as a promoter for Nike. Prefontaine was the identity of Nike and vice versa. Phil loved Prefontaine and had Hollister support Pre’s.

Finally, Bowerman reveals another facet of this character, which comes as a big surprise. After a shocking disaster where eleven Israeli athletes are kidnapped and killed, Bowerman is irrevocably shaken, and resigns from coaching a few days after. This is the first time Bowerman is shown in a defeatist stance. But he continued to develop the waffle shoe design. Johnson also worked on the Pre-Montreal.

Overall, the tone of the chapter is promising, and everything is going good for Knight. It seems there is nowhere to go but up.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

1973 – A Synopsis

Problems have started cropping up – and not just for Knight. Pre, the star of the last chapter, finishes fourth in the Olympic finals. His financial condition also takes a turn for the worse because Olympic athletes weren’t allowed to collect endorsement money. Knight eventually decides to hire him and use him to spread the word about Nike.

Pre’s personality takes up a lot of the chapter. He is the sort of person people automatically become intimidated by when he walks into a room. The ice eventually breaks over a meal when everyone realizes how Pre is just like them.

Knight takes another important managerial decision – he gets Woodell and Johnson to switch cities. This is difficult because both of them have settled well in the cities they already are in, but Knight convinces them to do it. And he calls them butt heads in the process.

One of the most painful moments yet are chronicled in this chapter. The shoe market was changing, there was massive demand now for running shoes from Adidas to Puma etc but insufficient supply and Blue Ribbon was now less financially stable. Knight meets with his debenture holders after posting a loss of ($50K), and trying to answer their questions is very difficult for him. Staring up at him are working class faces who put their faith in him, and then and there, Knight decides that he will never take his company public – if facing a few debenture holders could make him feel so bad, what would thousand of shareholders do for him? He placates the debenture holders by telling them that he would keep the conversion rate the same for all the five years (when originally it was supposed to increase each year).

A suit is filed against the company in Japan, and they sue back with the help of Knight’s cousin, Houser. Houser is tenacious and competitive, and plays well in front of a judge or a jury. Knight feels drained because of the depositions he has to go through, where various questions are asked of him just to somehow get him to accept breaking the contract. His father provides him valuable support during this time, both familial and legal. Having such a focused thing to concentrate on gives his father a mission too.

A new law graduate, Rob Strasser, is added to the legal team, and he and Knight hit it off. They bond over work, over sports and over having similar fathers. Strasser also fully believes in the company’s cause.

Meanwhile, Penny is about to have another child. Knight is worried about supporting two children financially. However, after the child is safely delivered, Knight’s mind returns to his business, and Penny can feel it. Although Knight realizes that what he did wasn’t something he should have done, he doesn’t stop himself. Neither does Penny. It is amply clear that she understands him and his state of mind completely.

Knight starts a completely new system where distributors commit to support the Blue Ribbon supply with advance commitments which would give strength to Nike’s capital raising ability. This picks up pace with the shoe suppliers for solving the problem of demand and supply. Specifically, he asks for bulk non refundable orders six months in advance. Although he faces resistance in the beginning, by the end of it, the stores who aren’t included beg to be let in.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

1974 – A Synopsis

This chapter is a finger-biting account of the entire trial. It is described so well that the tension is palpable. Everything that could have gone splendidly right goes wrong in one way or another. Knight’s nerves are on edge after the countless question in the deposition, and he makes the mistake of not being well rested or well fed before coming to court. He breaks under pressure, often becoming incoherent.

Other witnesses don’t do too well either. Bowerman refuses to prepare for his testimony because of his deep disdain for the Japanese business and ends up getting intimidated on the stand, and Woodell gets so nervous he starts giggling while spelling his name for the judge. After the judge passes a gag order forbidding both sides to talk about the trial, the very next day, Johnson speaks to a salesperson who turns up in the court with the defense team. Overall, the case looks like a wreck. But amidst all of this chaos, Knight manages to convey the unstoppable belief that he has in his cousin – and it seems the cousin is the only one who does not in some way contribute to the worsening of the case.

The judge himself is a character whose different sides are revealed throughout the chapter. Increasingly dramatic and at first appearing very stern, it is later revealed that under all the dramatic announcements, he is a logical person who is simply making the most of a case that he doesn’t particularly like. His judgment finds in favor of Blue Ribbon simply because he finds that side most truthful – and it is shown how the judge is a very astute observer because he notices things like Kitami getting a translator but that Kitami would correct his translator in perfect English whenever he made a mistake in translation: an obvious ploy to pretend to not speak English well that went wrong.

This chapter is extremely well worded – throughout the proceedings, it seems that Knight and his company will lose, but when the point of ruling actually comes about, there isn’t incredulous surprise at them winning. The feeling of joy afterwards is very well captured, and Knight especially gets carried away with the feeling of victory.

They also needed money for a new factory since there was a weak supply line for the Nike brands.  Hiding the fact that they took a large portion of the Nissho financing to pay for a new factory was a risky move. At any rate, Johnson helped Phil out and took on the role of running the factory on the East coasts in Exeter, New Hampshire.

The other side however does not render the cheque immediately as per their settlement agreement. Another great victory is Jimmy Connors surprisingly winning the Wimbeldon and the US Open, both in Nikes.

Another important part of the chapter is Knight trying to recruit Strasser. Till now, Knight has never actually prepared a speech or arguments to try to hire someone. But he knows how valuable Strasser can be – and knows that Strasser too would love to work with Blue Ribbon. Eventually, Strasser’s only problem turns out to be getting his father’s permission – something Knight hasn’t prepared for. But that works out for the best and Strasser becomes the company’s first in-house counsel. It is clear that this is the bedrock of a relationship that is going to last for a long time..or is it? The number of similarities in their personal lives is already quite great, and now they are beginning a professional relationship too. As we see Bowerman becoming less and less focused, Strasser’s involvement simultaneously grows along side them.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

1975 – A Synopsis

This is where all the financial problems come to a head – there comes a point when the company is unable to pay Nissho, the salary cheques of the employees bounce, the bank refuses to associate with them anymore, an FBI investigation is prompted by the bank, angry creditors fly down to demand their money, all the while when the person from Nissho who was dealing with Blue Ribbon – the friendly Sumeragi – is replaced by a higher-up, Ito. He is so cold that Knight starts referring to him as the Ice Man.

Through all the troubles that emerge, the characters of three people come out through and through – Ito, Knight and Giampietro, the man Knight had hired for managing the shoe factory.

Giampietro gets the company out of a huge fix in a very unconventional manner. When the cheques bounce and the angry employees swarm around Johnson, Giampietro drives around to the owner of a local box company, demanding a loan of five thousand dollars. It is a mark of Giampietro’s personality that he actually gets the loan. He then hands out crisp notes to the employees, staving off one disaster.

The entire bank situation gets out of hand with the FBI potentially getting involved because of the missed pay cheques. Knight informs Nissho of the situation, preferring to be truthful. He also asks for a further loan of a million dollars to hold everybody else off. Ito demands to see the books before he makes a decision. This is a warning sign because Knight used the money from Nissho to build the Exeter factory – and Nissho had no idea about it. Knight spends a sleepless night, only to see that Ito handles it way better than Knight could ever have imagined.

Ito comes out as a sterling character who believes in Knight. Single handedly, after knowing the exact circumstances, he visits the bank and shuts up their threats forever. He pays off the remaining debt and tells the bank that they can stop hoping to get business with Nissho from now. Knight is delighted and relieved in equal measures.

Several creditors were arriving $100K owed here and there. The creditors are handled in an almost funny way – it would be hilarious if it weren’t so desperate – as Knight assigns a person to each creditor to make sure that they don’t bump into each other inside the building. A third person manages the movements and warns the handlers about the creditors. Knight jumps in and talks to the disgruntled creditors and manages to save the day for the time being.

The chapter ends on a positive note, a much more positive place than could have been expected with the way the financial state of things were. It is clear that Nissho is in with Blue Ribbon for the long haul. It becomes apparent again, that like at the time of the courtroom troubles, it is truth and straightforwardness that saved Knight and his company this time too. Nissho buys out the bank (remember that in the US, there hundreds of banks to choose from) and that the Bank of California was to no longer be involved with Blue Ribbon.

Penny, once again, displays her faith in Blue Ribbon and gives Knight a positive assessment to rely on in times of intense stress.

Part two, 1975 – A Synopsis

This is a very short, very sad chapter. Everything up to this point has been a description of Knight’s struggles with his identity (at first), and then the troubles of getting his business set up. Much of the other parts of Knight’s life – like, death, which everyone deals with – has not come in a large enough form for it to have affected him majorly. This chapter shows how the major characters deal with such a crisis.

The chapter begins quite happily – Blue Ribbon has come out of all the trouble, but they still lack a bank. After trying a number of them, they end up finally getting a bank who is ready to take them on – the First State Bank of Oregon, in Milwaukie. Knight is finally relieved and gets a good night’s sleep after weeks.

The Memorial Day weekend is coming up, and Penny wants to get away, and so does Knight. But as has been shown before, Knight loves to mix business with pleasure – and so he proposes going to Pre’s weekend meet, where he has invited a mix of some of the best runners in the world. The weekend promises to be fun and exciting.

Seeing Pre running inspires Knight, as usual. There is something different this time – Pre is not at his best, and everyone can see it, yet he puts in all he has in the last two hundred yards and wins. Knight recalls Pre’s famous saying, ‘Somebody may beat me – but they’re going to have to bleed to do it’, and vows to apply it in his professional life.

After the Knights drive back home after a good day, Phil receives a call just before dawn Ed Campbell over at the Bank of California (who Nike had just left), telling him that Pre is dead. Phil is shocked and can’t believe it, and tries to confirm the story. It is indeed true – Pre died in a car accident the night before. He was travelling home when he hit a bolder flipped out of the car and the car landed on him. Prefontaine was 24 years old.

Pre’s death is heartbreaking particularly because he was so young. Knight compares it to his age – when he was twenty four, he had hardly lived life. Pre was already world famous and had so much to do. Bowerman is particularly broken down about Pre’s death, having been his coach through tough times, and having also survived the attack on Israelis at the time of the Olympics. Bowerman gives a beautiful eulogy, but look completely spent thereafter. Having been an unstoppable force, it looks like Bowerman is finally slowing down, and this may be a hit from which he may never recover.

Pre was a beloved athlete, and people start leaving gifts at the place he died – flowers, letters, notes, even Nikes. Knight and the rest of Blue Ribbon decide that they will collect everything and build a shrine for Pre, because he deserves that. They have no idea how they will be able to collect the money for this sort of a thing, but Woodell and Knight agree that as long as they are in business, they will somehow find the money for things that matter the most.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

1976 – A Synopsis

Going public is the question that is raised multiple times, and is rejected everytime. It is not just because Knight is afraid of becoming answerable to shareholders – it is because it will change the entire culture of the company. Bowerman finally snaps. First, he refuses to give a personal guarantee on a loan for the company, and then asks Knight to buy his share at a reduced price. Knight pleads with him to stay on and retain a small percentage. Later, Bowerman calls a meeting and tries to pick a fight where there is no basis for one. It is clear – he isn’t happy, and he doesn’t feel involved.

Nike, meanwhile, brings about a new revolution by changing the color of their most popular pair of shoes to blue, so that they go well with jeans. Till now, no shoes company had been able to massively breakthrough into the everyday wear market, and almost overnight Nike cracked the code.

For solving the factory problem, Knight selects Gorman and takes him to Taiwan with him to give him a refresher course of Asia. Here, Knight fulfills one of his earliest wishes – he goes and lives in a suite he could not afford at the time of his student world tour. This shows how far he has come from then. People also appreciate Nike at the trials, and Knight overhears a statement that says Nike is really beating Adidas.

Nike gets a huge victory when at the Olympic trials, most unexpectedly, the three men wearing Nikes all end up crossing the victory line first. Flushed with success, they hope for a Nike Olympic winner, knowing that this is the most legitimate way for a shoe company to show that it is truly in the game. However, as the competitor’s shoes are shown on television, it is revealed that Frank Shorter is actually wearing Tigers for the ’76 Olympic marathon. This is the defining moment when Knight realizes how invested he is in his Nikes – he is not making Nikes, the Nikes are making him.

This chapter very candidly shares the kind of work culture Nike had at the time. Their annual retreat is called Buttface – and even though they are posting millions in sales there is nothing formal or corporate about this retreat. Ideas are discussed and dismissed in raucous voices, peppered with appropriate insults. It doesn’t matter who comes up with the idea, there is no hierarchy, counter-budgets are proposed, distribution is re-considered, all in a congenial relaxed creative hotel bar. No one is out of reach of the insults, including Knight himself. Knight feels brotherly love and loyalty for his entire team and knows that they will face the world together.

Meanwhile, Knight’s family life is suffering as he is spending less and less time with his friends. He ruefully admits that this is not a problem he can solve with the help of his friends and his team. He questions his parenting style – which is also his leadership style, i.e. not being hands on – and wonders if it is wrong or right. As a parent, one of his boys is perpetually frustrated with him because he doesn’t have enough time for the family; while the other boy adores him no matter what.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

1977 – A Synopsis

Nike is now moving forward in two aspects – innovation and advertising. Both of these are giving it the kind of momentum that has begun to scare the big players like Adidas and Converse. Knight meets Rudy and Bogert, who bring with them the crazy sounding idea of using air bubbles in shoes soles. While skeptical at first, Knight thinks the idea has potential when he tries it out. On the other hand, Bowerman comes up with an idea that ends up causing injuries to people. Though the people do not lash back, Bowerman becomes dejected. Knight tries to console him, but what actually works in the end is his competitive spirit – when he comes to know the new air sole idea.

Knight starts focusing on college teams and getting them to wear Nikes. Strasser proves more invaluable than ever, because he shows himself to be a great negotiator. For the third time in this story, honesty is what leads them to what they want.

Nike becomes popular not only because of sportsmen wearing their shoes, but because of the relentless efforts of one of the guys on the team handing out Nikes to anyone and everyone on Hollywood. Appearance in a couple of very famous shows ensures that those models sell out like hot cakes.

Knight still is skeptical of the reach of advertising, although he loves the new campaign.

The question of going public comes up again, and this time Knight cannot evade it. He realizes that it is inevitable, and so puts it to a vote. The answer is inconclusive. While still going through this mental upheaval, Knight gets a letter from the Customs Service saying his company owes them twenty five million dollars.

This is the result of lobbying from competitor companies and the use of an archaic law which stipulates that any importer of nylon shoes must pay a tariff of 20% of any US competitor’s shoe price. So these US competitors made a small run of shoes and set the rack rate to an insane price. The law was retroactive as well so $25M needed to be coughed up. Knight decides he has no other option than to hit back with all he has got because it is financially impossible to pay such a sum, and then continue to pay at this rate.

Knight’s frustration and anger are highlighted like never before. Earlier, he has been in tough situations but he is never portrayed as particularly aggressive. In this situation, he ends up mashing his phone to a pulp thrice.

Meanwhile, with sales climbing, the Knights decide to buy a new home. Although emotional about leaving the one in which their kids grew up in, they decide they need more space, and they can definitely afford it. Knight’s struggle with fatherhood continues. He begins to rectify his lack of presence by being available for all weekend games and sports that his kids participate in. He soon realizes that Matthew isn’t really interested in sports. Unfortunately, this effect rubs off on Travis as well, who is actually quite talented.

Knight feels let down by his kids, because sports are such an integral part of his life. It isn’t just that he mentions Nike as his third child, it is also that he has seen life through sports metaphors, and has climbed out of the most difficult times in his life by simply going for a run.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

1978 – A Synopsis

Strasser is once again ready to defend Nike against injustice, but both Strasser and Knight are aware of the fact that he can’t on the US Government alone – they would need help. Enter Werschkul. Werschkul is an eccentric but extremely intelligent person whose job is to move to Washington DC and help sort the case out. Though starting out very well, Werschkul eventually loses his mental balance working over the project, and Knight decides he himself will have to head to Washington.

Nike suffers through a major failure. The Tailwind is released – the new shoe with twelve new innovations including air in the soles! It gets sold out faster than any other model, but soon there are serious complaints and the company has to issue a recall and refunds. This hits everyone hard, particularly Strasser. The overall mood at the company seems pessimistic, even as they try to console themselves. The only person who seems to have achieved something positive out of this entire episode is Bowerman – he seems to have come out of his slump at this news.

Knight also decides to start a line of apparel because that would give Nike more respectability and diversification. Till now, Knight has made sound choices about his staff and their positions. This is when he makes a major mistake for the first time – he hires Nelson as head of the apparel department, and realizes later how unfashionable Nelson is. It is too late to make a change, however.

Nike moves out into new offices, and Knight notices the fact that his team looks eccentric and underdressed at best and ridiculous at worst. He institutes a dress code, which is met by rebellion. Sticking to his guns, he starts religiously fining anyone who doesn’t follow the letter as well as the spirit of the dress code.

Eventually, as Nelson comes out with a disastrous result (as was expected), though horrific, the situation is so hilarious that it breaks the tension for everyone involved, including Knight. Knight then puts Woodell in charge of the apparel line, and competent as ever, Woodell churns out a brilliant result.

Knight also reflects on the fact that he is steadily approaching burnout at a time when he is facing one of the biggest problems facing his company. He sits in his office – in his new chair that his designer has fashioned like a baseball mitt – and instead of appreciating himself and his team for having come thus far, can only see the problems looming in the distance.

Knight’s faith in Woodell has always been a salient point of the story, but is outright stated in this chapter when Knight wonders if he should just make Woodell do every job including his own, since he does everything so well. Knight is not looking forward to going to Washington but realizes it is something important, and deserves the best he can do. He also thinks that maybe the only way out of a potential burnout situation is to work harder.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

1979 – A Synopsis

Finally in Washington, Knight tries to logically argue with the Customs official, but there is nothing which seems to move him – flattery, appeals, the American spirit, the truth, nothing. Knight has support from the treasury department, but he simply waves it off saying the Treasury department’s memo isn’t binding on Customs.

Knight now realizes what a difficult time Wershckul was having. Knight keeps on commuting to Washington, meeting with important people and trying his best to get ahead of the situation. Finally, it seems a good opportunity is at hand when they secure a meeting with Senator Hatfield. They spend a considerable time going over every possible argument and every possible counter argument. Knight is extremely worried about the meeting, and is so nervous that he gets extremely sweat before the meeting. His chief worry is that if they are not able to convince him, they may not get another chance.

Finally, when they meet the senator, he needs no convincing – he directly tells them he knows of their situation, and what can he do to help? Both of them clash on this and can’t decide, because they aren’t ready with an answer – they didn’t expect the Senator to already be on their side. Knight says they will get back to him soon.

The efforts finally pay off and the bureaucrat is under increased pressure to stop pressurizing Nike to pay. Knight derives a certain satisfaction at getting back at the bureaucrat (whom he refers to as a bureau-kraken).

Nike does a tremendous job at the new retail space they open in Portland. There are long lines and people want to try out everything that is available. There is so much pressure that even Knight helps out. He realizes why it is so important to carry on, no matter what – this is what the company is, and he has to keep fighting to keep it this way. The Nike office also shifts again, this time to a huge forty six thousand square foot building, complete with a steam room, a library, a gym and endless conference rooms. Knight consciously leaves behind the baseball mitt chair. He, however, does not feel a sense of victory as he should, seeing his team shifting into bigger offices. He is still worried about all of it being taken away any day now, and with that worry over his head, is unable to enjoy what should have normally been a great win.

The problems that the company was facing in Japan begin to narrow down in Taiwan as well. Knight knows that it is inevitable that he will have to move to China. He reaches out to David Chang, who is supposedly the best expert on the country. Chang presses all the wrong buttons at the company. He makes a fat joke after meeting Hayes, Strasser and Jim Manns, the new CFO; and mistakenly assumes Woodell is temporarily in his wheelchair and asks him when he is getting out of it. Knight optimistically tells him that there is nowhere to go now but up with Chang. 1 Billion Chinese  = 2 billion shoes.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

1980 – A Synopsis

Two things happen in this chapter that changed the course of history – Nike entering China, and going public.

Knight and his company are told that things are done differently in China – they have to be issued an invitation to be able to go to the country and start talking about business. So they send a very lengthy formal request on Cheng’s advice, and hope for the best. Fortunately, they get a positive reply.

Knight is really keyed up about this and wants to do everything right. He makes himself and his entire team who is going to go with him read up on China, its traditions, customs etc. He also decides to stop in Japan before going to China, to give everyone else a chance to acclimatize themselves to Asia. The meetings go really well, although they find that the factories and the shoe market in China is underdeveloped.

They solve the Customs problem once and for all by playing by the same rule that is being forced on them – they manufacture a very cheap shoe, so customs calculations would have to be based on that. Secondly, they start a TV commercial sympathetically telling the story of a hardworking Oregon company who is forced to fight with the big bad government. This gains traction among the public.

As a masterstroke, they file a suit against the government. Finally, the bureaucrat gives in. However, Knight is in no mood for a quick settlement. He refuses to pay a single penny. Over time, he is convinced by everyone around his that this is the best course of action to take, and settles for 9 million. There is a moment as he signs the cheque when he reflects how far he has come from times when he could not pay a million dollars in debt without fear of the cheque bouncing.

Knight’s primary problem with going public is the lack of control, and so when he is told that there is a way to go public without losing control, he is all for it. His team agrees. They work on the process – hiring a law firm, preparing a prospectus, meeting with various important people on Wall Street, debating about the price. It is the latter which causes much argument. The law firm is not ready to take the price above twenty one a share, and Knight is determined to have it at twenty two. He believes they are worth that much, and there is another company called Apple that is going public at the same time, at that price too.

After everything is settled, instead of feeling an overwhelming feeling of victory, Knight is surprised that he feels regret – he wishes he could do it all over again. Throughout the going public process, he has been thinking of defining moments that have led his company to where it is right now. There is a strong sense of nostalgia.

He wakes up and overnight he is worth $178 million, but he doesn’t feel any different.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

Night – A Synopsis

The epilogue is set in 2007 and explains how far everyone involved in Nike has come till now. It shows the efforts Nike has made worldwide to make lives of people better, how the company has become even better when hit with problem like the sweatshop controversy, and how it is continuing to grow in the present. His hometown has honored him in a myriad ways, by naming buildings after him and Bowerman.

The epilogue deals with some very heartbreaking deaths. The first of these is the death of Knight’s son, Matthew, who dies in a diving accident after a life of running away trying to find himself. Knight still wonders if his being around more would have helped Matthew be a different person.

Bowerman dies after going back to the same place he was most nostalgic about. Knight recalls every memory with him, of running for him, that meeting that started the company, and how he was the creative genius behind so much of the company’s success.

Knight also reveals that he shares a very good rapport with all the athletes that endorse Nike, and how they have been there for each other in hard times.

Although Knight has since retired as CEO, his mind is still looking for new things to do. He feels restless, burrowing into his childhood memories and thinking of his family. The idea of writing a memoir pops up in his head because he believes that the story of Nike hasn’t been told properly. Additionally, it might inspire or help a new entrepreneur who may also learn from the mistakes Knight made. It is important to find a calling in life and never settle for a career or job. It is important to be persistent, but it is just as important to know when to quit and move on to the next thing.

He often wonders about doing it all over again – what he would change, what he wouldn’t do. Knight also candidly admits his failings. As they became rich after the public offer, the money affected both him and Penny in embarrassing ways. Penny took to going around with thousands of dollars in her purse and Phil started wearing sunglasses everywhere. However, when the initial silliness wore off, they return to normal. Now they make it a point to give away a lot to charity and want to leave most of their money after they die.

Knight contemplates on his favorite moments from the entire journey, and thinks of what all he would need to write his memoir. He remembers all those letters from Johnson that he could never keep up with, he thinks of the slides he had after he came back from travelling the world.

Seeing the movie The Bucket List also puts him in deep thought about his own bucket list. Having discovered nothing substantial that he could begin on immediately, he feels a little restless, but as soon as he chances upon the idea of writing a memoir and working towards it, he feels at peace again.

shoe-dog-by-phil-knightThe above notes are based on ShoeDog by Phil Knight – Founder of NIKE INC.

Pharmaceutical Industry – Understanding the Opportunities and Challenges from an MBA perspective

It is easy to dislike any entity that puts a price point on your health, seemingly taking advance of your “inelastic demand” ie. absolute need for their product or service. However, the economic reality (the dismal science) is more nuanced than most consumers can imagine………

We should be able recognize that the benefits brought through the value creation and the value capture in the pharmaceutical industry far outweigh the negatives.

What I Learned: Pharmaceutical Companies Have More Than One Solution to Patent Lapsing Crises:

Nexium is basically a rebranding and re-patenting exercise because Prilosec’s patent was elapsing. Nexium was twice the dosage, twice the fun. If you want to grow the PPI (proton pump inhibitor) category because GEEEEERRRRDDDD!!!! is where stomach acid is too effective and so makes the product look and act the same as the predecessor.

SO there are a few things you can do when your patent is elapsing. 1) re-patent: create a new version of the same product; 2) push the drug into the over the counter world.

You could also move your drug to Over the Counter as eventually was the case with Nexium. You should try to squeeze (i.e. maximize) as much value out of these products as possible, just like any other industry. I also learned that GERD is a real issue (if you have heart burn more than 2 times a week) but the obvious problem being that the real disease is mixed up with a bad sandwich or a bad diet. In your marketing, you may be mixing people who need it with people that don’t. With over the counter solutions, you are relying on the individual to make the choice. Now that the drug can be bought with a prescription, the pharmaceutical company is lacks about the possible dangers of the medication. This grey area generates surplus revenue for the firm but in this case; as with many drugs, you cannot blame the doctors for mis-prescribing. From a pharmaceutical standpoint, it is nice to have some plausible deniability when it comes to selling drugs that simply inhibits stomach acid from being produced properly. Basically, a side issue is whether messing with stomach acid production is medically sound in most cases…why not create a drug for other semi-real conditions? Some drugs are created to fulfill a condition that is relatively benign…shyness for example (Paxil, Prozac, Celexa, Zolft, Lexapro, Luvox).

What I Learned: Over The Counter Medicine = Trusting Patients, All of The Sudden:

Another topic of debate is around whether patients should have the ability to self diagnose. Here we are asking the question of whether Claritin is something that should be over the counter when prior to 10 years ago, it was a prescription drug. I guess the key point is the market needs to be educated and overtime some patients do educate themselves about products that are prescribed. In an organic sense, those patients then will transmit their experience to non-patients who are considering using what was once a prescription drug as well. Moving from prescription and over-the-counter is a strategic move that can pay off.

I guess what we learned here is that in a career in Pharma, you should attempt to push for over the counter when it makes strategic sense to do that (when the patent has elapsed) in order to continue to extract profit from that drug without being too precious about the consumer understanding. Here, we have to just basically except that consumers have the ability to make decisions. They definitely have that ability to have the cognitive capacity to make their own choices in most cases. Perhaps patients should have to take a test to validate their understanding? Imagine if there was an IQ test to own other items such as a gun!? Could be useful none-the-less…or maybe not.

What I Learned: Nexium – Recycling is Not Reinvention:

It might look very lame that a pharmaceutical would recycle a product. This speaks to the logic of marketing as the core function of a pharmaceutical company over the still important but less so development of the scientific breakthroughs. From an economic standpoint, there is no company without marketing and distribution, no centralized government can effectively manage this at present or historically. While breakthroughs create the patient value, it is the ability to ‘capture that value’ which allows the pharmaceutical company from continuing to operate. In essence, while a new drug was a better product only slightly, observers may find reason to dislike this recycling behavior. However, this is a function of the legal system and marketing tactics. Learn them and apply them to generate both patient and corporate value.

Going forward, I realize that as long as you delivering value and there is asymmetrical information amongst patients and doctors, you as a pharmaceutical company have an important role in generating value for shareholders AND patients. Being smart about recycling a product for patent reasons is critical. You need strategic vision at the top of the firm. I believe that my logic of giving a price break for Nexium (since it was a rebranding of Prilosec) was sensible and that’s what they ended up doing. So my instincts aren’t off.

What I Learned: Pharma is Lucrative in Aggregate / Variable for Individuals:

Pharmaceutical industry is rewarding on a personal level, professional level and community level, however expect to move around between companies in this industry. It is rare for a person to stay within one pharmaceutical company throughout their career. Why is that? Because trials in one of the phases does not go forward, i.e. Pfizer shutting down Alzheimer’s drug R&D or even more obviously, patents expire and depending on strategy, employees might be strung along thinking their career at PharmaX is still secure but then they get fired abruptly….

While I knew that Michael Porter’s Five Forces ‘dictates’ that the Pharmaceutical Industry is the best industry to work in on an industry level, consider the individual risks in pharma. Do my pre-MBA marketing skills make sense in this highly regulated industry? Actually, yes. Working in Pharma sounds remarkably like working in a giant media agency which is what I was doing in the UK prior to my MBA. You wouldn’t be sane if you stayed in an agency role for longer than 18 months. However, if you have say a PhD in Bio Chemistry from an Ivey league school who is “perfect” for pharma but is extremely risk averse and very particular about any mistakes or any imperfection, you might be in for a shock. Generally, scientists don’t mind invalidating hypotheses but secretly want to discover the next penicillin.

What I Learned: What Skills Do You Need to Excel (Other than Microsoft Excel)?:

Data Analytics, collaborative leadership, articulate impact and learning agility. Another skill is managing your reputation for accountability and having a passion for patients (kind of a skill). Therefore, I would say that Rotman and IBM alike all say data, data, data, data a bit too much. However, anyone with a tough real-world experience knows that data is easy to abuse, subject to skepticism and 91.5% percent of the time is a means of validating your 1 existing deductively derived hypothesis so that you don’t look like a fool and data that invalidates your hypothesis is then hidden or downplayed. Also data in some circumstances inhibits decision making…“We don’t have the data so we’re NOT going to go forward with your strategy.” Not withstanding the above, data is awesome. Collaborative leadership; I’ve seen the opposite also work. Example Steve Jobs or Jeff Bezos etc. Very much vision driven, vicious people tend to win as well. So, the key is to do something amazing to build credibility so that you can really lead people over the top in order to create and capture insane value. And if you want to slick about it say “collaborative leadership is my thing” and “patients are my passion”. These statements can be true anyway, but priorities in practice mean that you might not always be collaborative or may not always be passionate about a patient (for example in an exceptional circumstance).

What I Learned: The Shareholders Will Dictate Internal Decision Making If They See Fit:

When GlaxoSmithKlein’s C-suite leadership said they were happy with having 20 drugs coming down the pipeline, CFAs and analysts with limited qualifications or knowledge of pharma fealt that there were not enough new drugs. The stock market responded aggressively to GSK’s claim of being happy with a more modest pipeline of new drugs. GSK then changed its strategy, finally they evolved their thinking do declare that there were no new blockbuster drugs in the future. The issue here is that analysts effected the company, partly because the C-suite was not able to win the case that 20 drugs is good enough.

Therefore, shareholders are very powerful with publicly traded companies. If shareholders decide that they know better than management, and that R&D should be netting X number of new drugs and not 20 new drugs, then you as a manager need to sell the idea that 20 drugs is very good: you need persuasive public relations or you will be side-swiped by shareholders who think the aggregate market demand knows the optimal allocation of resources. And if you don’t like it consider going private like Dell etc. Of course, stock options are a huge incentive for employees even in the pharmaceutical industry.

What I Learned: Variable Costs versus Fixed Costs:

If a cost is sunk it’s something you will never get back. So, do not calculate your price by including fixed costs. Do not calculate your marketing price to include fixed costs.

Pricing Should Not Include Fixed Costs, But Does Include Variable Costs

This quote causes cognitive dissonance in my brain. The fixed costs are basically sunk cost in their entirety. While patents are fixed costs, and patents obviously impact price indirectly, fixed costs does not impact price. Fixed costs used to create the products, i.e. the R&D for the products are sunk costs. While you might think that the price is impacted by the costs to develop the product, you would be mistaken, even if you think it is obvious that costs are fungible and Asthma medication prices have some fixed cost baked in….you’re wrong. I always assumed that the price of any commodity includes Fixed Costs, now I’m told that reference prices and variable costs are the things that effect price. Also, ability to pay and willingness to pay are variables in pricing. The question is why is this the first time you’re hearing that fixed costs is not relevant to price? 

What I Learned: Price is Not About Science (Really):

This is shocker that causes cognitive dissonance: but what it means that what the drug does is not as important as how the drug ends up in people’s bodies. The point is that science is roughly 25% of the value and marketing is 75% of the value? The claim is memorable because it seems incorrect. However, getting on the Formulary via sales and marketing efforts is far more important than the fundamental function the drug has on the patient’s body because the drug would never get into the patient’s body if it wasn’t distributed, sold, marketed.

The price is not impacted by the Fixed Costs nor by the Patent which has no value in its own as it is not a trade-able commodity. The end consumer has a limited influence on the price. The science and the patient are at the core in any public conversation but in order for this business to operate successfully, the marketing, sales and distribution are at the core of the private conversation. The general public is not attuned to the inner workings of business; and the philosophical debates about morality are out of scope when it comes to successful strategy in pharma. There IS no pharmaceutical company without a serious understanding of the economic, capital intensive realities needed to create pharmaceutical products.

What I Learned: One of the 6Cs is Conscience:

This is the major concern about working in the pharmaceutical industry: conscience is an important consideration but is one of many. If the perception is that your Pharmaceutical company is abusing patients (Shkreli) and your marketing message is “F’ You! Market Forces say the price is 1000X” then that will impact shareholder value positively but you might attract even the most spine-less of politicians to criticize you. So really conscience is connected to shareholder value. Shareholder value means getting the market right not just increasing prices when you have a patent on your product; conscience/ethics/morals are a complex set of normative values to wrestle.

I would say that criticism that pharma creates value and then captures value too aggressively is a perception issue. A family friend has MS and hates the pharmaceutical industry believing that the industry is incentived by profit to the extent that they could be repressing the cure for MS, and certainly not doing the R&D to find it and instead aim to medicate patients in order to grow a subscriber base that is dependent on these firm for the patients wellbeing. My family friend says pharma has a hand gun pressed against his head and could increase prices for medication if they liked. Taking this analogy, I would now respond that it may seem that pharma has a hand gun pointed at your head but you’re forgetting that they invented/created the hand gun/value in the first place. If you don’t take your medication then you know that you are worse off but if this 1920 (pre-invention of the drug), you wouldn’t be able to say that you are worse off without this drug so in order words, you should be happy to have a hand gun pressed against your head if it helps you lead a more productive life. In the end, the choice is yours to make as an MS sufferer. Pharmaceutical has great power because it creates amazing innovation that is extending people’s life and the quality of life (in most cases). So when they charge a high fee, it seems like “GAUGING” but with few exceptions, they are using they are creating this value and they are going to want to capture that value in order to create further value.

What I Learned: Conscience Shifting is An Admittance of A Competitive Market Reality:

The topic of Jack Kay (CEO of Apotex) came up; he gives away drugs! Drugs are sent to the country of South Sudan and/or given away for free, as something called a conscious shifting exercise. It’s interesting to me because we know certainly Bill Gates was ruthless against competitors such as Netscape and Apple. However after he retired from Microsoft, Bill Gates became one of the most prominent philanthropists around the world and in particular in Africa. This conscience shifting could very well be “time goodness” shifting. Conscience is one of the six C, and like an episode of Star Trek, your conscience could actually be temporal as well as in the medium term; rather than right now when you have to maximize shareholder value. In fact, you could say that successful entrepreneurs aggregate and collect as much value in the short run with the objective of giving back to the community in the long run; in some cases. Perhaps this is a method for justifying any controversial measures in business in the short term; because in the long-run you will more than compensate society.

I actually think this idea has a lot of legs, and lags. What good is being kind if you never grow to effect change at a greater scale? Because we do know that being conscience of your own actions in an industry where there is controversy is important. We need to recognize that the benefits brought through pharma far outweigh the negatives. In the long run we should however engage in conscience shifting as individuals; in order to create a society that we want to see around us. We should, for example, when we are near retirement, be willing to except a lower salary in order to cultivate future leaders within a particular field. I disagree with the idea that management at the senior level should be making the most money but rather they should be spending the most time mentoring future generations in the business. I believe that is one major challenge with the baby boomer management generation, they will not let go of power and yet they aren’t the smartest person in the room all too frequently. IQs may be degrading over time after all!!!!

What I Learned: The Intersection of Government and Pharma/Business:

I think the intersection between government and business is made very clear in Pharma: with the example of Apotext and their generic pricing being abnormally high in Canada relative to other developed countries. We can clearly see here that the government is supporting and advancing Trump/Macdonald/TommyDouglas-style economic nationalist interests and that we can clearly see here that the support of Pharma in the generic space has fascilitated a giant factory in Vaugh to be created. So, there are clearly benefits to getting close to government officials, convincing them that you are in fact a job creator that deserves special support from the government, and it’s potentially the case that funding and donating to political parties is definitely in play. This is donations activity is a problem because the political interests are mixed with the benefit to the self-interested political as well as the rationale for supporting local business in return for donations. And in fact, I’m sure Barry Sherman donated to both conservatives and liberals as they were both in attendance at his funeral.

Getting close to government officials convincing them that you are in fact a job creator that deserves special support from the government, and its potential he the case that funding and donations to political parties are definitely in play. The convergence between government and business: what we perceive to be corruption may not in fact the corruption, or at least it may be just a mixture of 20% corruption and 80% good public policy. It’s very difficult to delineate whether getting funding from a pharmaceutical company to back your candidacy is an ethical violation, I am no lawyer thankfully. Certainly, we know politicians are usually not looked at very positively, neither is Pharma so these two groups are actually happy bedfellows in the pursuit of the public interest or is it their own interests? I’ll be taking this insight too the bank.

What I Learned: Ministers will Jump Ship if They Think They Will Lose:

With politicians, again the connection is evident that working with politicians to advance your commercial interests is a strategic advantage to your pharmaceutical company. So working with Erik Hoskins and networking within the ranks of these government institutions, we can endeavor to manipulate public officials with fundraising offers and get the most out of them in order to benefit ourselves while also benefiting the wider community. Again, self-interest will overlap with community interest in that case.

In Ontario, Canada, Erik Hoskins was the provincial Minister of Health and he moved on to lead a national Pharma care strategy. Here you can clearly see that career shifting was related to an impending election where Hoskins was expected to lose. Erik Hoskins is positioning himself potentially down the road to be the leader of the Liberal party of Ontario. Even with Doug as leader, the Liberal party is unlikely to win this election (written in February, 2018). So, what we see is a mixture of the self-interest of the politician with the greater good of a national pharma care strategy. It’s very difficult to decouple the two because self-interest and public interest overlap.

What I Learned: Patent Law Is Very Cool:

I suppose this is where I realized I should’ve done that Law degree in the end. Although I’m not all that interested in becoming a clerical lawyer or patent troll, I just think that what’s interesting is that you could make a clerical error and have a patent thrown out on the basis of some kind of filing mistake. I guess the other idea is that you can hide relevant information about how the chemicals work in the pharmaceutical product: You can make it is very difficult for third parties to actually replicate your product which is a requirement of a patent that it be made public. Of course, people like Barry Sherman kept things honest by contesting patent applications that were misleading.

Patent law is a fascinating area for me: Apotex will sue very aggressively on a regular basis. The reason being is that there might be some filing clerical error made. Another reason that you might contest a patent is that you believe there is prior art so on the one side patents are balancing the interests of the patent holder by ensuring that they are can protect their investment but then also make it relatively easy to contest a patent although the risks in terms of costs are significant in order to ensure that we have an honest patent system.

What To Do About It: The market will penalize the company for trying to do a deal that they haven’t done before:

The tyranny of the stock market is a kind of check against poor CEO decision making. The classic example we had in class was around the deal that was made by Abbvie. It backfired because I know the deal that was done with Apotex where they granted them particular advantage and that was a bad move in this case. You can clearly see that that was a mistake after the fact and the CEO was fired but you could argue that Apotex was very effective and they basically destroyed the company.

The tyranny of the stock market is a kind of check against poor CEO decision making. The classic example we had in class was around the deal that was made by Abbvie. It backfired because the deal that was done with Apotex where they granted them particular advantage and that was a bad move in this case. You can clearly see that that was a mistake after the fact and the CEO was fired but you could argue that Apotex was very effective and they basically destroyed the company.

When you’re doing a deal, you need to be careful because the stock market will respond and try to re-calculate the net present value of all future cashflows looking at the information they have in the marketplace. The stock investors are actually supposed to just make judgments on the stock price based on the available public information which they do but what I find quite interesting is that in the pharmaceutical industry in particular you have a very asymmetrical set of information internally in the organization that will hinder stock investors from understanding what the strategic vision.

What I Learned: The Three ways to Affect the Timeline of a Pharmaceutical Company:

you can reduce costs, increase your revenue, or advance capabilities so these are the ways that you can grow your firm. The one thing I would like to draw attention to is the idea of building partnerships. Your firm is more valuable if you have partnerships and in fact the stock price will reflect that. So, if you are acquiring new companies and or creating networks with other companies. You can create the strategic position to lead in a particular subset of the pharmaceutical industry. That idea that your valuation is improved by building partnerships is one that I was not familiar with at all.

I think strategically I will try to work in areas of the company that our building partnerships and creating advantage through synergies with other players in the space. A key thing in the class has been the idea of capturing different parts of the value chain or having a holistic view of the value chain with in the pharmaceutical industry. So I think that your company is valuation will be significantly impacted by partnerships and that might be an area that I would focus and if I were to go after a pharmaceutical career.

What I Learned: Opioid Crisis:

The Oxytocin crisis is very much a real crisis however we know that the situation is very challenging from the distribution folks at the McKesson. It certainly is critical in deploying the oxycodone to communities. Famously over 13 million pills were shipped to a town of only 1000 people . It should’ve triggered red flags but it didn’t at McKesson. So, there are a bunch of actors on the value chain. What was really great in class was having government, doctors and the pharmaceutical companies all 3+ considering how to tackle the opioid addiction situation. And what we concluded was that no one had direct responsibility and by shifting blame to others, everyone could wipe their hands of the responsibility. But we didn’t mention was that the individuals as patients need to take ownership over their own decision making. And in some cases shockingly it’s true that some patients actually intentionally want to have a great time and then leave this mortal world behind. As uncomfortable as that is to admit should we institute the death penalty for drug dealers? Perhaps it’s worth considering. The Philippines certainly has had a successful round of deterrence through death penalties. On second thought, the most affluent drug dealers will have the best lawyers in order to avoid the death penalty and the poorest drug dealers will have the worst lawyers and will get the death penalty. So that’s not a great solution….

The value chain….

Pharmaceutical Companies

Distribution Companies

Doctors

Patients

The opioid addiction crisis actually highlights the intellectual struggle that we have in academia. The thinking in terms of all actors is useful however the solutions aren’t happening because each actor in the system doesn’t (and cannot) take responsibility for the whole system. They only take responsibility for themselves and perhaps this is the reason why well-meaning government could actually benefit this situation. And that is why I will advocate in the future if I work in pharmaceuticals to advance the patients perhaps put some bonuses around proper patient success rates (avoiding perverse incentives) so that pharmaceutical companies can successfully generate revenue from doing what they are to be doing anyway.

Building A Stronger Exercise Culture

Drivers Versus Conductors

About 33% of preventative healthcare is concerned with physical activity with the other 66% being food consumption mixed with other choices and genetic predispositions. Workers in most jobs appear to spend most of their time sitting down. Back in the mid-20th century, doctors would say to patients “what ever you do, do not exercise!” So there was a lot of confusion about the health benefits. Then there were tests conducted in the 1950s, led by Jerry Morris (https://en.wikipedia.org/wiki/Jerry_Morris), that showed that the conductor in double deckers bus (who would have had to walk up and down stairs) have a better quality of life than then driver of the bus. The conductors had to climb the stairs 1000s of times to check ticket in the upper deck. Cardiovascular activity is critical. It turns out exercise helpful for dealing with heart disease.

Olympics Versus Citizen Wide Exercise

Building a national exercise program is a wiser allocation of funding than building an Olympic stadium according to Simon Kuper. I agree. I love the Olympics, but I love average live expectancy past 90 years old much more (for fellow citizens of my own country and beyond). We need the local facilities while not necessarily commercial viable OVER the Olympic facilities gained through winning a hosting city bid which will rarely get used post games (i.e. take a look at London’s 2012 Olympic stadiums). Spending $9 billion on the Olympics is country brand signalling, cool, but those benefits are notoriously difficult to quantity in financials or otherwise. Expanding the local facilities infrastructure to be all weather in norther countires like Canada, Sweden and the UK is a worthy endeavor. Exercise facilities at work should also be subsidized, potentially by government. Expanding exercise opportunities comes with risk of course; first, what if people don’t show up to use these facilities? It’s kind of crazy that no one has successfully proposed a tax deduction for gym memberships. Being afraid of tax scams is hardly the major concern. There are steps to drive traffic for sure, but the culture of sedentary life is ingrained and a slow moving epidemic we will never “see”. I’m not saying do something foolish like Tennis Canada’s board member who advocated that tennis domes be built in every town under 5000 people. Leave the details to others at this point. But if the federal government were to intervene in any healthcare area (thinking in chunky terms and being blindly cavalier about revenue spending right now) why not look at preventative healthcare via an exercise mandate with teeth.

Civil society in Canada is very weak. On average, people don’t even leave their house if they don’t have to. Health benefits of exercise are massive and then of course, it’ll improve the happiness of people, you will see improvements in actual performance in global competition because you have a healthier population. The subset of people who actually participate in the Olympics is very very minute and it usually upper middle class to wealthy people. Making exercise and sport more accessible to train and compete will boost the quality of life across the income spectrum. Exercise has to be in a physical space: investments are underway, but the next generation needs to be obsessive about social exercise.

Group Buying In Stores – Experiential Shopping Idea

Micro-Blue Hours – This is just a retail footfall driving concept I thought I’d share: If your retail store is having difficulty driving footfall (which drive revenue), it’s worth exploring the K-Marts Blue Light special concept. This marketing gimmick was intended to keep shoppers engaged. Basically, the way the Blue Light special worked is that suddenly of the intercom the store manager would say “attention K-Mart shppers” and a blue light would point to a product that was then massively discounted in the K-Mart store at random times of day; making the shopping experience fun and an activity all its own is novel. Everyone loves a bargain.

I think that group buying in stores is an interesting way to draw customers to your store. The twist I would add is to imagine customers coming to the store at a specified time: 6pm let’s say. Customers are offered a free orange juice and then those customers vote on the items they strongly want discounted today, be it diapers or groceries whatever. The store manager has a iPhone app where customers vote, and then there is a 1 hour window in which all customers in the store or arriving at the store can get a 50% discount on upvoted items. Crazy right?

Step 1: Customer Votes Are Aggregated So That Those With The App Can Get A Discount

 

Step 2: Voting Has Ended, Count-Down for Most Voted Item Starts

 

 

 

 

Step 3: Countdown Clock for the Next Hour, Using the App, Customers Scan for A Discount (Making Shopping Unpredictable & Fun)

Possible Draw Backs to This Idea

  • A) What if customers routinely vote up an item but are overruled by other shoppers? This “never getting your way” problem explains exasperated political disenfranchisement…But my answer is, it’s better than the store dictating based on inventory or internal drivers. Let the market democratically determine what items people want discounted.
  • B) if everything in the store is discountable, then the frequency of discounts in high value items will drive the economic value of the given items down over time. The Groupon effect is where the discounts actually lead the company to discount their own efforts relating to delivering the service, and also prevent product discounts that are believe the average variable cost for housing the items because they want the customers without the “marketing spend” which is in effect a discounting spend. The danger is that the price point will reach a new equilibrium where customers consistently co-ordinate for diaper discounts for example.
  • C) Finance and accounting considerations are not central to this marketing campaign but are the most important considerations in terms of profitability. I haven’t run the math for how this group discounting would be operationalized but the most powerful department in any organization nonetheless. These folks would need to be compelled with the “Micro-Black Friday” logic of enhance short-term earnings; a new tool in the earnings management toolkit.
  • D) Customer engagement risk is considerable.  Customers might not dig this concept. If they knew that they and their friends could artificially drive down the price of goods in exchange for their footfall, they may well try to game the system. Coupon and other models like the original Blue Light specials at K-Mart might be easier to operationalize but why not test this idea, if customers go to the store when they want.
  • E) Competition is between retailers and online options, the market is consolidating into giants like Amazon and Wal-Mart. That battle is being waged online, the management of Wal-Mart is unlikely to want to innovate on their home turf.

General Thoughts

My general thought is, first, is this sustainable? Just because they stopped doing it doesn’t mean it didn’t drive additional footfall. Of course, it’s hard to determine causation without A/B testing. It might make sense to have a Blue Light special on low volume days; perhaps Mondays or Tuesdays. Can you imagine your mother going to K-Mart to participate in a specific timed special? Presently,

Where Blue Light sales a bad idea? So, one criticism of business schools is their emphasis on winners. Everyone loves to study brands that succeed. Unfortunately, 20 years ago, many of the companies that were studied just aren’t around anymore. Hilariously, we look at Wal-Mart and love to speculate on their future. K-Mart is disappearing, but it doesn’t necessarily mean that their failures and successes should be disregarded.

 

Thoughts on Elizabeth Warren’s This Fight is Our Fight

Great Book, Inspiring Author

Elizabeth Warren highlights some incredibly important points relating to economic inequality, poverty and beyond. I really love Elizabeth Warren’s passion against poverty and this book centres around that topic extensively. Better than “Nickled and Dimed” which is a 90s classic, This Fight is Our Fight is kind of an invitation to swim against mighty economic currents. Or at least, think about the downsides of capitalism. And perhaps the immutable reality that success begets success and failure (without learning) = more failure. The core problem that I see is that poverty is in its extremest form life limiting. While this topic is wildly more complicated than language can convey, it is near impossible to disagree with the idea that when equality of opportunity is reduced, the GDP of the entire planet is reduced. Everyone should get a fighting chance at success, however they personally define it. Certainly, the story of Elizabeth Warren‘s upbringing should have readers draw the conclusion that poverty restricts opportunity. At the same time, she’s a direct example of herself succeeding despite and perhaps motivated by that poverty. Anger, for lack of a better term, is good. And her voice is a powerful and credible one in a network of ideas that she hopes to coordinate for her run in 2020. Poverty after all, sucks.

A Background in Financial Poverty, Fighting Spirit Is Inspiring For Everyone

Elizabeth grew up wearing plastic bags for shoes, living in a house where the carpeting was broken apart and worn out. Her experience of poverty is shocking and tough to read. And she discusses it in depth. Some readers will be able to recognize that level of poverty, however most people probably did not wear plastic bags for shoes growing up. No matter what you’re own background, it’s a pretty remarkable level of poverty that Elizabeth endured. Born Elizabeth Herring, Warren’s mother worked at Walmart, which Warren – is quick to point out – is now a huge conglomerate worth billions of dollars. Her mother was paid a really low amount there. Elizabeth Warren made the mistake, in her own summation, of marrying early instead of going to school. However, she was able to get the education (through night school) to validate natural or environmentally induced intelligence and by not turning to drugs, being curious, moving to where the actions at, she was able to kick ass. So in effect, Elizabeth was actually very wealthy in spirit and through economic justice, that error of birth was corrected (maybe an interesting way to think about it)? Poverty made Elizabeth a fighter. Who knew? The government needs to be there for the right person, at the right time, at the right place, and also it’s still the individual that has to get up in the morning; no one will do that for you. It would be cool if she addressed how important she, herself was to herself…in coordination with the support of others.

Economic Injustice Or The Way Things Are Right Now, This View Needs Clarifying

Warren’s mother working at Wal-Mart story is an interesting story; everyone knows someone who has been impacted by Wal-Mart. Wal-Mart is an excellent scapegoat for folks who are negatively effected by its success. And it is indeed a pretty fascinating story in American business and Sam Walton’s Made in America literally inspired Trumps Make America Great Again hats. Success for Wal-Mart has meant driving lower prices, greater economies of scale and consolidating mom & pop operations throughout the US. That’s a mixed outcome for sure.

On the one hand, you have to admit that $4.97 kitchen utensils is kind of amazing for customers; who get the most value out of Wal-Mart not even the CEO gets as much value as customers (in aggregate). CEOs typically only get about 1% of the total revenue that they orchestrated. And also, consider how executive compensation works, you’d be insane to work at Wal-Mart if a similar role paid more for the same amount of work. On the other hand, the actual low function roles of stocking shelves, directing customers to the checkout etc etc, are paid not so well…it’s a frustrating reality! Salary capping would likely led to creative ways of rewarding C-suite executives so the reality is success rewards the successful over time. Would customers like to pay $6.97 for utensils or $4.97? Salaries are expensive and the value that Wal-Mart brings is mostly in low prices, democratizing the utensils! Everyone can afford them.

While reality is more complex, the fact that Warren’s mother was poorly paid is a kind of injustice; being paid to work while others sit planning operations, increasing shareholder value over employee value, it does (on the surface) make for a very compelling story. Why should someone, who’s parents paid for school no doubt, get paid more than someone who didn’t get the education needed to progress? I guess being intellectually free means releasing your mind for ideology, which means you can consider the reality of scarcity in economic terms. Thinking freely, you have to then ask what are the available/future solutions against low wage employment? Did Elizabeth Warren’s mom consider moving to another town to get a better job? Yes, but she made other choices. Schooling? Not something she pursued. So, if the solution Warren proposes is to hinder innovation and economic development, then those solutions have hidden costs. Why should bureaucrats decide which businesses thrive and which die? Does it have to be that businesses are bad, and workers are good? Sometimes, this book reads that way. A thriving middle-class creates the customers that Wal-Mart needs, the job creators aren’t just the entrepreneurs but the middle class people themselves so it’s important that Sam Walton and others not forget who is the real job creator (alongside the enrepreneur). Honestly, I was a bit surprise that Elizabeth’s solutions are lacking in depth perhaps because lawyers aren’t in the creative problem solving business OR more probably because she needs to stay strategically vague on policy so that she can campaign in 2020 without giving away her negotiation positions upfront, too early.

Side Note: I can still enjoy her message without agreeing with everything right? And I should be allowed to point out that it’s lacking in certain areas? Well, political parties do not allow you to criticize the boss. I however am intellectually free.

Emotional Power, Maybe a Bit Much, Though?

If you don’t at least tear up reading this book, you have no soul. But if you don’t start getting concerned about the repetitiveness on stories of poverty no matter how gripping, you have no clue. I mean, if you want to run for president, where is your foreign policy, your policy on NAFTA? etc. And so we have to ask a critical question which is whether Elizabeth Warren being political in her storytelling? Of course, she’s running in 2020. Does this book detail policy objectives? Heck no! Watching Warren grilling a Wells Fargo CEO or a captain of industry, is cathartic and entertaining but perhaps a little bit over dramatic. Just a bit. This book is an extension of those Senate hearing that show-case Warren’s demonization of the big bad corporate bureaucracy, and the complacency of the upper middle class when it comes to how (some) companies* create value.

*Credit card companies, banks etc….provide a service and some executives do not handle that relationship well, according to Warren but it definitely takes two to tango. Complicating.

Bill Gates Joke and How Averages Are Deceiving

Warren has a very hilarious quote: What happens when Bill Gates walks into Moe’s tavern? Congrats, on average, the patrons of that bar just got 51 billion dollars richer! The truth about averages is they are misleading and can potentially mislead in negative ways that aren’t anticipated. You can say that on average American standard of living is getting better but real wages have been static. The truth is that many people aren’t getting the benefits according to the data Warren is looking at from 2015 backwards. Warren’s point is that people are hurting a lot more then is measurable in anecdotal stories. It does sometimes sound like envy actually but it’s cool. What Warren is missing is the perspective of business and value creation. Like the guy who invented the latest product, she would likely say why can’t he share most of his wealth with his employees…the truth is that most of the wealth of a new widget go to the customer through it’s usage. Founders usually only get 1 or 2% of the wealth created from the idea they create. You could say, yes, well that was not created in a bubble, yes, but that entrepreneur did create and then capture that value….without him or her, there is no value…See…it’s complicated.

Warren on (FDR) i.e. Roosevelt, She Should Spend More Energy talking about the Benefits of Business (Small and Corporate)

Elizabeth Warren looks at Franklin Delano Roosevelt and sees an amazing 3 term president. He was a great guy who thought about things in terms of benefiting both finance and the broader society and he is the model for Elizabeth Warren. I think that makes a lot of sense. However, it was an exceptional time in American history. In talking about FDR, she strongly implies that the economic prosperity that followed the new deal can be attributed largely to government Keynesian economics which is hard to know for sure. Why? Because there were many variables at play in the 1940s and 50s that led to American economic leadership on the global stage. In reality, it is more complicated than words can describe. There were entrepreneurs and American industry involved during the FDR era which Warren appears to massively downplay. The Ford motor company was a huge, literal, engine of growth, for example. Also, think about war and industrial build up.

Entrepreneurship Happens When Motivated (both through Poverty or/and Opportunity), Warren Needs to Fix That Claim

Warren is partisan in the sense that she assumes that, for example when the economy is good that’s when entrepreneurship happens. I think that is partly true but also entrepreneurship is increased when someone is unemployed and more people are unemployed when the economy is in a downward portion of the business cycle. New businesses occur more frequently when there aren’t easy jobs with great pay to be had. When the going get tough, the tough create businesses because they can’t find an employer. The opposite is also possible, when there is money to be made, people switch to their own businesses ideas. But on balance, it is more likely that entrepreneurship happens when a person can’t find a job, an immigrant that can’t get job for example, is a budding entrepreneur because desperation (within reason) is a great motivator. Warren is an academic and the challenge with academics is they aren’t directly in touch with the world around them; they are more susceptible to confirmation bias, they are the most analytical people. And believe me, there’s a big difference between intelligence and analysis. Complicating this further is the fact that Warren is building her 2020 campaign with this book. So she can’t honestly be more balanced because she is trying to build a campaign around scapegoating the economic winners in America.

Deprioritizing Economics in Warren’s Political Preferences, It Should Be Addressed More Seriously

Warren seems to channel these compelling emotional stories of poverty in order to support a politically based argumentation. She doesn’t necessarily have solid solutions other than to increase regulation, it’s a tight rope because she wants to be president so what she spends more of the book on is about how abusive some businesses have been. Focusing on the abuses is cathartic and convenient as she doesn’t want to say what she would do as president just yet. Politics is about pulling people behind your bandwagon; it’s persuasion and finding enemies that we can all smack down together. If you de-prioritize how economics works (or doesn’t work) then you will find Elizabeth Warren’s arguments a breath of fresh air, unmitigated by economic reality. And of course, reality can change over time. However, finance and accounting are honest reflections of reality for the most part. Artificially manipulating industry usually makes the economy less efficient unfortunately, increasing the cost of goods and services. At least that’s what’s happened in the past. The data can be manipulated to show the opposite but generally, we know that people are motivated by incentives that benefit them as individuals; sad but true. The problem is Warren is not an economist, she’s a commercial law professor, so that’s reflected here a little bit when she extensively highlights the story of poverty and almost no mention of the fact that most people have to make a living without government support in the business world (private sector). There are excesses, transgressions but most businesses are at war with their competition, it’s about the bottom line. While I have witnessed financial poverty as well as poverty of mindset, poverty has to be fought with precision not inexact redistribution of wealth. When and where the government should show up to help people in need is probably the biggest challenge of people who will live through the 21st century; Warren is pretty simplistic or unsophisticated in the solutions needed to get the right services to the right people are the right time or at least intentionally vague because she’s running in 2020, she’s negotiating with voters.

Warren Strongly Suggests Economic Inequality is a Zero-Sum Game, She Needs to Revise That View

In order for business succeed, the poor have to fail, according to Warren’s more aggressive passages. In reality, the disagreement is to the degree to which banks should be restricted in terms of their practices of predatory lending. They still have a critical duty of resource allocation in the economy. It is a very nuanced and a complex issue, which really requires policy tests, A/B testing regulation for banks; think like a scientist. You’re kind of disagreeing with what I think is an empirical reality around the fact that the “proper allocation of banking resources and accountability towards those who are mathematical inclined to advance their own interests but then also advance the communities interests, is not a zero sum game.” Unfortunately Elizabeth Warren seems to think it is a zero sum game or have indications that that plays well to her support base. If Apple creates another iPhone, does that wealth get distributed to customer’s who use that product as well as employees? I think so. Even if production is overseas? Yes.

Credit Card Companies, An Easy Scapegoat for Elizabeth Warren, This View Needs More Nuance

Credit card companies are providing a service but are misleading customer according to Warren. Warren points out this because there was so much profit being generated from credit card policies, credit card policies that were particularly not focused on making customers aware. She points out that it was almost impossible not to join that chorus of business people making so much money off of customers. You could not feasibly be an executive in a credit card company and argue against misleading customers in terms of interest rates (annual price rate) because you were undermining your own ability to accrue revenue from customers. I would say, it’s hard to say that customers aren’t completely oblivious to debt.

Warren Misses A Better Solution for Credit Card Problems, FacePalm!

But what’s an obvious solution that Warren completely misses is that students in high schools throughout the US DO have to learn about the time value of money. Individuals should be better informed as part of the solution, not simply increasing restrictions on what credit card companies say and do. The fact that students aren’t learning about how finance and accounting work and then are allowed to hold credit cards, start businesses or work in government is a bit baffling. I mean, it’s obvious that teachers themselves might have difficulty teaching these concepts since they are focus on calculus for the 35% of students who pursue science, technology, engineering and math. However, much more important is finance and accounting than calculus? Way more. Warren knows this, but this book is not about solutions I suspect as I’ve mentioned above…

British Petroleum, Another Easy Scapegoat for Elizabeth Warren, This View Is A Bit Biased

Elizabeth Warren makes an excellent point when it comes to the British Petroleum catastrophe in 2010 in the Gulf of Mexico. In this case, they had a bunch of fines from the federal government. What’s interesting about those fines ($7 billion in total) is that they were able to expense those fines. In other words those fines were tax-deductible from their total profit for the year. Remember that a tax deduction reduces the total amount of money in your pool of money that the government can then tax so if I have $1000 profit and then bought a $200 car for my business, I can expense that so that I only have $800 of profit from which the government can tax me at the 25% rate. That means I pay $800 x 25% = $200 rather than $1000 x 25% = $250. So in essence, BP had a huge tax deductible amount in 2010. And BP is very powerful, they have connections in Washington and London.

Money in Politics, Always A Bad Thing for Elizabeth Warren, That View Needs More Nuance

The solution should be for the best ideas to win regardless of where they come from. However, Warren is saying that the lobbyists in the House of Representatives and the Senate are gaining undue traction and affecting public policy with their commercial interests at the centre of decision making. Seems likely but she basically thinks that all lobbyists are a bad thing. Or at least her persuasion tactic is to convince her voting base to believe that all lobbyists are evil. However, she is downplaying the benefits of having lobbyists explain the details and nuances of technical policy to decision-makers in order to get the optimal decision for the best outcome for the economy. Of course, Warren might say the economy is rigged so that’s a complication. Lobbyist restrict the number of doctors in the market, thus increasing their salaries for example. We have to ask if it’s the actual structure of the lobbying that is the problem and that she is incorrectly attributing all lobbying as being bad or if she believes that the self interest of a single organization is a problem even though the self interest of an organization will obviously benefit the broader economy as well as the organization itself. The problem is that the lobbyists have run amok in her view and that might very well be the case however we can’t generalize all obvious as bad and all consumers is good. Also, what’s the solution?

This book is a fundraising solution for Elizabeth Warren for sure!

Unions At the Negotiation Table, Sounds Good, Might Have Complications

Warren was arguing with that union leadership should be at the table (Board of Directors level) as well as the corporate executives. Add a 25% corporate representation versus some 75% union and community leadership representation. The reason she argues this is that you can be sure that the interests of American workers can be protected so that even while the cost of production goes up with wages that corporations can’t do anything about it. For example, the corporation will not be able to do foreign manufacturing in places like Mexico at $0.75 USD per hour. Trump’s position on manufacturing is certainly overlapping Warren here; so that might be a nullified issued if she is the Democrat nominee.

Other Interesting Ideas from This Fight Is Our Fight

  • Walmart is being subsidized by tax payers because employees collect food stamps.
  • Warren advocated boycotting companies like Nabisco that move their production to Mexico? (My thoughts: consumer coordination is pretty difficult in practice, i.e. the prisoner’s dilemma)
  • Astro turf campaigns versus grass roots campaigns….an Astro turf campaign is when a politician is backed by big donors to basically do whatever they want versus grass roots campaigns that raise funds from many small donors; (My thoughts: clearly financing campaigns is pretty daunting in the US…should be a way to fund the best ideas, not the best politicians).
  • Brookings Institution is a bad actor / think tank.
  • “Corporate, corporations”; these are almost dirty words for Warren. Lady Justice can be bought by big business. (My thoughts: She’s too perfect an academic to make the mistakes that sometimes happen in business, sometimes irresponsibly, but more often because mistakes are part of innovation. It is indeed heart wrenching, and easy to point fingers from the side lines, when things go terribly wrong for example: GlaxoSmithKline heart attack deaths due to Avandia)

Warren’s Priority List (Probably):

  • Poverty should be avoidable through government support (my thoughts: hard to disagree, but how, to what degree, how precise? Do businesses help reduce poverty at all?);
  • Prices are something that should be artificially adjusted by governments to help the poorest people (my thoughts: there are really bad hidden costs to restricting businesses like fewer jobs, less dynamic economy, less creativity / innovation, human nature is not as malleable as Warren wants it to be, how do you curb the excesses of capitalism without punishing good businesses as well?);
  • Education is good but there also has to be stable jobs for people who are risk averse (my thoughts: yes, some people cannot survive in a competitive business world, so giving them easy jobs and good pay is a kind of social service, who pays for that though? Through tax revenue, there must be a better way, test out solutions!);
  • Businesses are self-interested and do not care much about their customers (my thoughts: I don’t think that’s really true, it only looks like that when a customer gets a raw deal, it’s easy to point out horror stories because they are memorable and heart wrenching; it doesn’t mean they are the reality for most people);
  • Hidden costs of higher taxes aren’t as important as helping the poor directly (my thoughts: it’s the job of the children of babyboomers to solve this problem, it’s complicated and involves a more scientific way to deliver public services);
  • Great economic growth should be sacrificed because the benefits to the poorest are more important than those who struggled and then successfully created new business and new economic activity (my thoughts: hard to agree, if we focused all resources on the poorest people, then we would be under-serving the people who can create more tax revenue who then contribute to the tax revenue needed. It’s complicated!).

 

Final Grade

-A

Warren Buffet’s Life Advice Revised

Making Decisions On Things You Understand:

Think very hard about the decisions you make, you only need to swing at the pitches that you know you understand.

Build A Model For Understanding the World:

What is it about your model of the world that is wrong? Understand how you understand the world.

Reading is the Gateway to Better Insights:

Read all the time. Learn all the time. You can take courses online. The information is out there. Exercise your brain by reading before bed. Ideally, spend at least 4 to 5 hours per day reading.

Salacious Stories Sell More, Unfortunately for the Reasonable:

Some of the sentiments about viruses are more salacious and therefore the press runs with those stories because of $ad revenue and traffic benefits to their websites.

Don’t Fear Failure:

You can still go forward.

Look for a Job You Would Take if You Didn’t Need a Job:

Life’s too short to take a job that you won’t be passionate about. We will solve cancer, obesity and climate change: Science is a big problem solver, these are the areas that we are going to solve.

Keynes Essays on Persuasion:

Keynes theorized that output would be 4x what it was in the 1930s. The distribution is a problem. But you free up people with the possibility to do other things when new technology distributes old processes. The people that fall behind on the weigh-side do need help for sure. There is a macro picture that is a total opportunity.

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